Losing or not qualifying for tax exemption under 501(c)(3) is stressful for a lot of reasons. But if you have a 403(b) plan, you want to be sure that the plan doesn’t fall victim to an ‘eligibility failure’ and start treating your employees’ pre-tax contributions as taxable income. If your organization finds itself in this position, you can use the Voluntary Correction Program (VCP) to get back on track.

It’s important that you be proactive in contacting the IRS about the eligibility discrepancy. You’ll need to fill out Appendix F (Streamlined VCP Submission), Schedule 6 (Employer Eligibility Failure 401(k) and 403(b) Plans Only) and pay a fee to maintain the tax benefits, but the fee is not significant. Then, the assets can be transferred to another type of plan.

It’s definitely not official, but there is considerable talk about the narrowing gap between 401(k) and 403(b) plans. Therefore, the need for both types of plans is questionable. Some of the primary issues that separate the two plans are the special contribution limits for church and 15-year and permissible investments. So, while regulatory trends point in the direction of consolidation, there are numerous hurdles to overcome before a merger is realistic. What about you? Do you have an opinion?

There will be no reprieve for late filings of Form 5500’s for 403(b) plans.  The Department of Labor (DOL) decided not to grant a unilateral extension for Form 5500 and 5500-SF, which was due July 31, 2010. You can, however, file Form 5558 to get a 2 ½ month extension. The DOL believes that the current processes for obtaining an extension meet the needs of plans that need additional time to file. Retaining the deadline also avoids complex and costly system changes.

The American Benefits Council had requested that the deadline be moved to the later of December 31, 2010 or 9 ½ months after the end of the plan year. They were concerned about stress on companies filing a new form or filing for the first time. In addition, the need to file electronically using EFAST2’s Web filing or an EFAST2 vendor was complicated due to the recent completion of software implementation.

The July 31 deadline applies to a calendar year plan.

If you have 100 or more eligible participants at the beginning of the plan year, then you likely need to have your plan audited by a qualified public accountant. For the purpose of the audit requirement, the participants are not simply defined as anyone who has an account balance. Participants also include persons who have met the age and service requirements for participation. However, there is some leeway offered to small plans via the 80/120 rule.

A plan that covers from 80 to 120 participants at the beginning of the year is in the gray area of the audit requirement. Basically, such a plan may choose not to have an audit if it did not need an audit in the previous year. If the plan has more than 120 participants, then it must be audited in the current year and subsequent years as long as it has above 100 eligible participants.

Get Moving Now!

The wide gap between the regulatory requirements for 401(k) and 403(b) plans is about to disappear. It’s important to take effective measures now to prevent regulators from cutting into your wallet. And, you don’t want to ignore the IRS. The new requirements issued July 24, 2007 apply to ALL 403(b) plans.  Fortunately, the extra requirements, while burdensome, are not insurmountable.

Read the rest of this entry »