non profit 401(k)

[Lori H]

non profits who maintain a 401(k) are subject to full Non Discrimination testing, correct? If so, then what is the benefit of having a 401(k) as opposed to a 403(b)?

Thanks

[J Simmons]

Correct. But before you dump the grandfathered 401k make sure that's what is truly wanted, because it cannot be re-started later. Compared to a 403b plan, with a 401k plan you have (a) much better developed regulations and rules than those funky new 403b regs, and (b) much greater skill/knowledge level among TPAs and CPAs for assistance in administration. Both give the ER a greater level of assurance that the plan's operations are complying with the applicable regulations.

[Below Ground]

A BIG problem with 403(b) Plans is the application of universal availablity with Form 5500 and the audit requirement. You may only have a participant count of 50 or 60 (small plan filer) with a 401(k), but have 140 to 160 (large plan filer) with a 403(b).

I note that I use those specific numbers since I have a case that has those values. While the exact counts for 2008 and 2009 are not yet final, we know that the costs will basically skyrocketed in 2009! If it was a 401(k) with eligibilty exclusions, the lower counts would have applied, and the fees would have been about 1/4 the expected 403(b) cost in 2009.

When applicable, this is a HUGE problem.

[Guest Sieve]

John --

Why do you reference grandfathering an existing non-profit's 401(k) plan? The prohibition on non-governmental tax exempts establishing a new 401(k) was repealed some ago--I think in about 1997. (See IRC Section 401(k)(4)(B).)

[J Simmons]

Must be living, thinking in the past--Bill Clinton's first term, that is! Don't ask, don't tell.

[Guest mjb]

A BIG problem with 403(b) Plans is the application of universal availablity with Form 5500 and the audit requirement. You may only have a participant count of 50 or 60 (small plan filer) with a 401(k), but have 140 to 160 (large plan filer) with a 403(b).

I note that I use those specific numbers since I have a case that has those values. While the exact counts for 2008 and 2009 are not yet final, we know that the costs will basically skyrocketed in 2009! If it was a 401(k) with eligibilty exclusions, the lower counts would have applied, and the fees would have been about 1/4 the expected 403(b) cost in 2009.

When applicable, this is a HUGE problem.

Why would the fees be so much larger because of universal availabilty and how much more will be the cost in $. Wouldn't the saving in not having to do ADP testing offset the any costs due to universal availability?

[Guest Sieve]

John -- What!!?? You mean Bill's not President anymore?? Did anyone tell him that?

[J Simmons]

John -- What!!?? You mean Bill's not President anymore?? Did anyone tell him that?

"Where troubles melt like lemon drops

"Away above the chimney tops

"That's where you'll find me"--and Bill

[K2retire]

John -- What!!?? You mean Bill's not President anymore?? Did anyone tell him that?

"Where troubles melt like lemon drops

"Away above the chimney tops

"That's where you'll find me"--and Bill

I live in Kansas, why does that sound so familiar?

[J Simmons]

John -- What!!?? You mean Bill's not President anymore?? Did anyone tell him that?

"Where troubles melt like lemon drops

"Away above the chimney tops

"That's where you'll find me"--and Bill

I live in Kansas, why does that sound so familiar?

Is it from the Jayhawks basketball fightsong?

[rcline46]

Back to mjb - in the example given, the cost is so much higher because of the fees for the required audit. The audit alone is likely to run $7,000 to $10,000 payable to the auditor. I have seen audits run to over $30,000.

Since you can no longer exclude union employees under the 403(b) unless you offer them their own plan, you can get over 100 (120) participants real easy. Remember it is NOT how many are contributing, but how many are eligible to contribute that is the participant count.

[Bill Presson]

A BIG problem with 403(b) Plans is the application of universal availablity with Form 5500 and the audit requirement. You may only have a participant count of 50 or 60 (small plan filer) with a 401(k), but have 140 to 160 (large plan filer) with a 403(b).

I note that I use those specific numbers since I have a case that has those values. While the exact counts for 2008 and 2009 are not yet final, we know that the costs will basically skyrocketed in 2009! If it was a 401(k) with eligibilty exclusions, the lower counts would have applied, and the fees would have been about 1/4 the expected 403(b) cost in 2009.

When applicable, this is a HUGE problem.

Why would the fees be so much larger because of universal availabilty and how much more will be the cost in $. Wouldn't the saving in not having to do ADP testing offset the any costs due to universal availability?

I'm assuming the additional costs are for the plan audit.

[Below Ground]

As pointed out my rcline46, the audit is not cheap. In the situation I referenced above you are going from about $2,250 complete to around $14,000. (I note that the increase participant count also increases the compliance/reconciliation fees.) So that you can compare apples to apples, the compliance/reconciliation fee would be $4,500 given the higher participant count (an increase from the 401(k) by itself). Don't forget, starting in 2009 we are talking about a totally new servicing standard for a 403(b) Plan.

From a cost perspective, ADP Testing does not by itself create a big fee. It's all the other issues that now need to be reviewed and reconciled. This creates a situation where the Plan's size does matter.

[Guest mjb]

As pointed out my rcline46, the audit is not cheap. In the situation I referenced above you are going from about $2,250 complete to around $14,000. (I note that the increase participant count also increases the compliance/reconciliation fees.) So that you can compare apples to apples, w/o the compliance/reconciliation fee would be $4,500 given the higher participant count (an increase from the 401(k) by itself). Don't forget, starting in 2009 we are talking about a totally new servicing standard for a 403(b) Plan.

From a cost perspective, ADP Testing does not by itself create a big fee. It's all the other issues that now need to be reviewed and reconciled. This creates a situation where the Plan's size does matter.

Why would an 403b audit be so expensive if the funding is provided through annuities and MF and the assets aree not held in a trust? Unless my math is wrong, I dont see how an audit could cost $10,000. I have not seen another commentary on such a prohibitive cost for an audit of an ERISA 403b plan. Perhaps the answer is to only allow salary reduction contributions to a 403b plan to avoid being subject to ERISA and audits.

[Below Ground]

MJB - I don't do the CPA's 5500 Audit, as I am a TPA, so I can't really justify the related fee. I can only tell you what CPAs are telling me they will be charging. I can also tell you that the audit covers a "host" of items that you might be surprised to find need to be covered by the audited. For example, "payroll controls".

Again, I note that I can't justify those fees since that is not my role. I can, however, note that simply because someone says that a fee should not be that high does not mean that it won't be that high; especially when that person (including me) does not do that specific job.

For example, should someone, who is not a lawyer, say fees charged by lawyers are not justified? (I know that people do that, but that doesn't make it right.) Since I am not a lawyer, do I really understand the work and costs of that work? I would say "no". Similarly, unless I am a CPA that does 5500 Audits, I don't think I can justify or argue with that fee. While I might shop around for a better fee, ultimately, a person who does that work will set that cost.

I would suggest that myself and rcline46 were simply pointing out that the "buyer needs to beware". Given the changes that will apply to servicing 403(b) plans for the 2009 year, the "buyer" needs to consider the impact of "participant count" for both "normal service fees" and fees related to the 5500 Audit. Can use of a 401(k) with its ability to exclude employees be used to keep costs down? Why would you not want to ask this question?

Just as an aside, many Not-for-Profit Entities don't have any HCE; meaning the impact of the ADP Test is zilch. If this is the case, and use of the 401(k) prevents the need for the 5500 Audit, why not go with the 401(k)? I suggest that each situation deserves consideration within the context of that firm and plan.

Agree?

[Guest Sieve]

mjb -- Isn't the IRS considering requiring an audit for all large 403(b) plans, even if not subject to ERISA--i.e., even if only deferrals are permitted--or is the potential audit requirement going to include only 403(b) plans that are subject to ERISA?

[Kevin C]

I'm reading it as only applying to 403(b)'s that are subject to ERISA.

From the preamble to the proposed regs:

2. Section 2520.104-44

Section 2520.104-44 and the current Form 5500 Annual Return/Report instructions provide for limited reporting for pension plans exclusively using a tax deferred annuity arrangement under Code section 403(b)(1), custodial accounts for regulated investment company stock under Code section 403(b)(7), or a combination of both. Under the proposal, the exemption in §2520.104-44(b)(3) would be eliminated, with the result that Code section 403(b) pension plans subject to Title I would be treated the same as any other Title I pension plan for purposes of the annual reporting requirements under Title I of ERISA. With the growth in the size and number of Code section 403(b) arrangements, and the advent of Code section 401(k) plans, the Code 403(b) arrangements have become more like Code section 401(k) plans. In this regard, the IRS has undertaken to update certain of its regulations. See 69 FR 67075, 67076 (November 16, 2004). For those section 403(b) plans that are subject to Title I of ERISA, the Department has detected violations in a high percentage of its investigations of Code section 403(b) plans. The predominant issue has been improper handling of employee contributions. The Department believes that these developments warrant amending the annual reporting requirements to put Code section 403(b) plans on par with other ERISA-covered pension plans. Small Code section 403(b) plans generally would be 100 percent invested in eligible assets for purposes of filing the proposed Short Form 5500.

[Guest mjb]

mjb -- Isn't the IRS considering requiring an audit for all large 403(b) plans, even if not subject to ERISA--i.e., even if only deferrals are permitted--or is the potential audit requirement going to include only 403(b) plans that are subject to ERISA?

What section of IRC gives the IRS authority to audit 403b plans?

[Guest Sieve]

mjb --

I assume you mean what section of the IRC gives the IRS the authority to require an independent audit as part of the annual return. The answer: None.

But, of course, the IRS has the authority, itself, to perform "audits" of an annual return.

[Kevin C]

ERISA 103(a) gives the DOL the authority to require an independent audit report as part of the Form 5500 filing.

[Guest Sieve]

Yes, but mjb wanted to know if somehow I had discovered some hidden IRS authority to require an audit for a plan not covered by ERISA. Lo & behold, I hadn't.

[Guest mjb]

mjb --

I assume you mean what section of the IRC gives the IRS the authority to require an independent audit as part of the annual return. The answer: None.

But, of course, the IRS has the authority, itself, to perform "audits" of an annual return.

So, if there is no authority to require outside audits under 403b the audits you are talking about the IRS requiring for non ERIA 403b plans which do not file 5500s (which includes 90% of the 403b plans), are the audits for compliance with the 403b regs that everyone knows the IRS has authority to perform?

[Guest Sieve]

What?????? Translation, anyone?

The answer to your question, as best I can decipher it, is No. The audits I was suggesting might be required by the IRS of non-ERISA 403(b) plans were, in fact, independent audits required of large plans by DOL rules. I had heard that there might be that requirement, but I had not independently verified that fact nor seen the language in the preamble that Kevin so helpfully provided to straighten me out.

I was not trying to manufacture something out of whole cloth. I was mistaken. Plain & simple. Caught in the act. Drat.

Although, since Form 5500-EZ is required to be filed by certain non-ERISA plans--i.e., plans with no employees, which are, by DOL regulation, not subject to Title I--I'm sure the IRS could find some authority somewhere for requiring an audit for a non-ERISA plan, if that's what it wanted to do. Wait!! I have it!! How about IRC Section 6058(a), which requires any funded plan of deferred compensation (including 403(b) plans) to "file an annual return stating such information as the Secretary [of Treasury!!] may be regulations prescribe with respect to the . . . financial condition . . . of the plan . . ." Presto, change-o, the IRS issues regs and there we are!!