The IRS recently issued final regulations that are significant for organizations with 403(b) retirement plans (also called “tax-sheltered annuities” in some circles). Essentially, organizations will have to comply with many of the same reporting and auditing requirements that apply to businesses that operate 401(k) plans.

Action idea: Be prepared. The new regulations are generally effective for tax years beginning after December 31, 2008. Thus, it is likely that they will affect your organization for the first time this year.

The new regulations indicate that the IRS has become more serious about the operation of 403(b) plans. These plans have previously flown under the radar for much of the time.

Under the final regulations, an employer with 100 or more participants must provide financial statements in conjunction with revised Form 5500. An employer with fewer than 100 plan participants may qualify for simplified reporting procedures.

Keeping that in mind, here are some of the main elements of the regulations:

Auditing rules: Organizations subject to the Employee Retirement Income Security Act of 1974 are generally required to have their financial statements audited if they have more than 100 eligible participants at the beginning of the plan year. The audited financial statements must be attached to Form 5500.

Participant records: In furtherance of generally accepted auditing standards, 403(b) plan sponsors must collect participant records showing activities for the year. This is especially important if individuals have been assigned personal account numbers that are not linked by the sponsoring organization.

Plan administration: As a general rule, 403(b) plan sponsors have had minimal responsibilities in this area. Traditionally, the bulk of the responsibilities have been handled by a financial institution. Auditors will need to understand the controls in place, whether or not certain functions are being outsourced.

Financial statements: Under transitional rules, financial information for 2008 must be included in the audited financial statements for 2009. In the past, some organizations sponsoring 403(b) plans did not receive a statement of net assets and activities at the plan level. Therefore, they should promptly contact the 403(b) plan investment custodian to ensure that these requirements are satisfied.

Finally, your organization should be informed about any significant deficiencies in accounting procedures or internal controls that surface. A “significant deficiency” is defined as an item creating a risk of error in financial statements that may reasonably matter to a user of the financial statements.

The news, however, is not all bad for organizations with 403(b) plans. Along with other inflation adjustments for qualified retirement plans, the IRS has announced new thresholds applicable to 403(b) plans for the 2009 tax year. In general, the increases are slightly higher than they have been the past few years.

Here are some of the key changes that may be of interest to plan participants.

• The limit on the tax exclusion for elective deferrals increases from $15,500 to $16,500.
• The allowable catch-up contribution for plans with elective deferrals increases from $5,000 to $5,500.
• The annual limit on the compensation amount that may be taken into account for these purposes increases from $230,000 to $245,000.
• The dollar limit for additions to defined contribution plans increases from $46,000 to $49,000.

Thus, participants in 403(b) plans will be able to contribute significantly more to their plans this year than they did last year.

For further information, contact Lewis, Hooper & Dick, LLC at (620)275-9267.

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