The Department of Labor has just released FAB 2010-01, which answers many questions about Form 5500 filing relief for 403(b) plans with pre-2009 assets. The DOL had previously addressed this issue in FAB 2009-02, but the new bulletin answers many (but not all) questions which have arisen since then. The new bulletin also addresses the ERISA safe harbor exemption for certain deferral only 403(b) plans. We will address this in a future technical update.

The DOL had stated in FAB 2009-02 that, solely for purposes of Form 5500 (including any related audit), the DOL will not regard a 403(b) contract (i.e., an annuity or custodial account containing mutual funds) from a given vendor (i.e., insurance company or custodian) as a part of an ERISA 403(b) plan if the contract meets the following requirements:

1. the contract was issued to a current or former employee before January 1, 2009;
2. the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract before January 1, 2009;
3. all of the rights and benefits under the contract are legally enforceable against the vendor by the individual owner of the contract without any involvement by the employer; and
4. the individual owner of the contract is fully vested in the contract.

This update refers to contracts which meet these 4 requirements as “pre-2009 contracts." An employer need not include financial information for a pre-2009 contract on Form 5500 (including a Schedule H or I) and need not count a participant whose sole plan investments are pre-2009 contracts and who is not currently eligible to defer.

The following are some of the highlights of FAB 2010-01 regarding pre-2009 contracts:

• A contract can be a pre-2009 contract even though the employer is aware of the existence of the contract and communicates with the vendor. However, if the vendor requires the employer’s consent or discretionary decision with regard to a distribution under the contract, the contract is not a pre-2009 contract (see requirement 3). Presumably, this means the vendor could require the employer to verify employment termination (which is a simple communication and not a discretionary decision) without losing pre-2009 contract status.
• Loan repayments which the employer transmits to the vendor, while not technically employee contributions, nonetheless are contributions which would cause a contract not to be a pre-2009 contract because it would fail to meet requirement 2.
• If a participant exchanges a pre-2009 contract after 2009, and requires the employer’s authorization (as required under the final IRS 403(b) regulations), the new contract is not a pre-2009 contract. See requirement 1.
• Suppose an employer discontinues a vendor effective December 31, 2008. However, the employer deposits the December 31, 2008 deferrals in early January 5, 2009. The FAB concludes that the 2009 deposit does not violate requirement 2, and hence the contract may still be a pre-2009 contract.
• The reporting relief applies to large and small 403(b) plans.
• For a large plan subject to an audit, if the auditor discovers that a Form 5500 excludes a contract which the auditor believes is not a pre-2009 contract, the auditor should inform the plan administrator, and the plan administrator must take reasonable steps to resolve the matter. If the administrator and accountant disagree, the audit notes should reflect the disagreement.
• A plan can exclude a pre-2009 contract from the various attached schedules for Schedule H, such as the Schedule of Assets. The plan can also exclude these contracts from comparative financial statements. The relief applies to all plan years.
• An employer can exclude some pre-2009 contracts from Form 5500 without excluding all of them.

Form 5500/EFAST2 – 35 cities, March – May
We will discuss these changes and more at our annual Form 5500 workshop. We will discuss all the new filing requirements for 403(b) and qualified plans and all the new information the form requires. This workshop can help you prepare for this transitional year.