Tax Compliance

June 24, 2019

Statistics from the first quarter ending in 2017 indicate that there are over $26.1 trillion dollars in the U.S.
retirement system. This amount includes defined contribution and benefit plans, IRAs, and governmental plans. Of the $7.3 trillion attributable to defined contribution plans, $932 billion is allocated to 403(b) programs. The 403(b) plan can be used by nonprofit and governmental organizations to help employees save for retirement. Certain 403(b) plans that only allow for employee voluntary contributions and satisfy the Department of Labor’s regulations regarding an employer’s limited involvement with this type of retirement plan do not have the administrative requirements associated with the similar 401(k) plan.

403(b) plan can be used by nonprofit and governmental organizations to help employees save for retirement.

Plan Requirements

Employers and plan sponsors of retirement plans have the responsibility to ensure that these accounts are safeguarded. Additionally, they are responsible for continuous satisfaction of the many and complex tax qualification requirements to provide favorable tax benefits to the plan participants.

Plan sponsor institutions, which include schools or organizations subject to the Employee Retirement Income Security Act (ERISA), are required to file on an annual basis an IRS Form 5500 for their respective employee benefit plans. If the eligible participants at the beginning of the year are greater than 100, ERISA requires that an audit of the plan’s financial statements be performed by an independent qualified public accountant and attached to the IRS Form 5500.

An audit of an employee benefit plan is meant to comply with generally accepted auditing principles in the United States, as well as test the compliance with the rules of the DOL and IRS encompassed in the plan document.

The tax requirements of maintaining a retirement plan are numerous and detailed. Specifically, they involve two primary areas: the maintaining of a current plan document and ensuring the plan is operating in accordance with the complex regulations.

Plan Documents

These are the documents that are needed to be timely adopted and preserved in the plan’s record retention system. They should be periodically reviewed and, when required, timely updated for changes that are needed to satisfy a modification made by statute, or when needed for an employer discretionary amendment. Examples of an employer discretionary amendment include: eliminating a restriction on the number of loans available under the plan, or adding a discretionary non-elective contribution feature.

The plan document should identify all employers and affiliates who are participating in the plan, as well as those record keepers who are supporting the plan assets.

Plan Operations

The employer is responsible for the day-to-day processing of the plan’s provisions — from enrollment and eligibility through retirement and distributions. Frequently, the processes involve more than one individual or department. Examples include: the segregation and timely transmissions of employee contributions to the plan likely involve the payroll and finance departments; a hardship withdrawal authorization can be an HR function but the payroll department would need to be notified to cease employee deferrals for six months.

Best practices for consistent processing of transactions is to create documentation that contains the work steps and interactions of departments and personnel needed to implement, complete, and review the transactions.

Conclusion

In order to continue to provide favorable tax benefits with a 403(b) plan, an organization should seek the advice of experts and advisors who are knowledgeable in this highly complex area. The annual audit of a plan’s financial statements (if applicable) or a periodic review of the plan’s documents and operations needs to be considered as part of the risk assessment process within your audit universe.

About the Author

Louis F. LiBrandi

Louis F. LiBrandi is a Principal of the Employee Benefit Services Group of PKF O’Connor Davies,
LLP. He has more than 25 years of experience with employee benefit plans. Louis previously served as a Director in the Compensation and Benefits Advisory Services Practice at a law firm, was a Senior Manager at a Big Four accounting firm, and gained valuable experience as a Revenue Agent within the IRS Employee Plans Division.

A recognized expert on matters regarding the Form 5500, Louis speaks annually about this and other retirement plan topics. Louis has attained Fellowship status with the International Society Certified Employee Benefit Specialists and has earned the American College’s Chartered Financial Consultant designation. He has also attained the TGPC designation from ASPPA

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Tax Compliance