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Large AND Small 403(b) Plans: Beware of Schedules H and I
Large AND Small 403(b) Plans: Beware of Schedules H and I
Written by: Bob Toth
Practitioners and financial service companies are all well aware of the new ways in which the Form 5500 rules apply to ERISA-covered 403(b) plans for the 2009 plan year, and many are hard at work trying to put together the pieces. There has been a particular focus on trying to figure out how to fulfill the new reporting rules under Schedules A, C and G.
But those are not the only things to worry about. Take a closer look at Schedules H (Financial Information) and I (Financial Information-Small Plans).
When thinking about 5500 filings, we tend to think in terms of the filing deadlines. I don't know how many times I have heard in the past year the comment that "we have time," as the first Form 5500 filings for the 2009 plan year won't be due until July 2010. Plenty of time, one would think. But both Schedule H and Schedule I require the reporting of financial data from the beginning of the year, as well as year-end data.
Logistically, this creates a reporting nightmare for at least one – and maybe many more – specific reason: the "collectability" of data as of the beginning of the first plan year. Financial information that will need to be reported for large plans as of January 1, 2009 includes hard-to-get data such as consolidated participant loan balances; net assets; benefits payable; contributions receivable and general account values. In a multi-vendor environment, collecting this will be difficult, at best and impossible at worst.
In a plan funded with individually owned 403(b) contracts, some of this "beginning of the year" data is unlikely to even be collected and stored on a "beginning of the year" basis (if at all) at the individual contract level, and much less so on a consolidated plan reporting level. Imagine trying to reconstruct, in July 2010, the consolidated general account investments from several carriers, each with individually owned contracts.
This will be a particular problem for large plans, which will need balanced and verifiable audited financials (good luck there). But it will also be a problem for small plans, which will also be required to report net plan values as of the beginning of the year.
There are certainly other concerns lurking here at the intersection of the IRS's new 403(b) regulations and the DOL's decision to apply enhanced disclosure and reporting obligations on ERISA-covered 403(b) plans, but the way this one plays out will be front-and-center.
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Great points all. I assume that beginning of year asset information should and will be a part of the information sharing agreement that plan sponsors will be entering into witht the annuity providers. I would also think that the ISA should ask for this information in a consoldiated format.
Reply from Bob Toth:
Tony makes a good point, the ISAs need to cover this data. When you think about it some, there really are two kinds of ISA's: one for transfers, and one for ongoing administration. Assume you are a vendor who is on the outs, and didn't get a post-2008 deal with the employer. You won't do a "service agreement" ISA. And you don't want to allow transfers out of your old individual contract. Why would you want to sign an ISA?
Now, the IRS has said that these sorts of arrangements may not have to be considered as part of the plan for 403(b) purposes (but who knows what Rev Proc 2007-71 really says?). But the DOL isn't quite sure, and has not yet decided whether or not contracts like these aren't part of a plan.
If the DOL decides those contracts ARE in the plan, it puts vendors in a tough spot-they will need to provide that data for the 5500 anyway, under the DOL regs, even if they've lost the plan as a customer. It won't be easy for the plan sponsor, either.
Even tougher yet, is what happens under the new fee disclosure regs for these sorts of contracts? Vendors will have to disclose all sorts of things for these old contracts, and employers will need to track and report on non-compliance.
Vendors who are trying to limit their participation in the 403(b) market may have a hard time doing so. They may need to be well involved in a plan long past any time they would have otherwise thought necessary.
As Tony noted to me in a side note, its going to be an interesting 12-24 months…..