• Investments – The plan sponsor should regularly receive and review investment statements from the investment custodian. Additionally, the investment statements should be in the name of the plan, not the plan sponsor, to signify the assets are owned by the plan.
   
• Reconciliations – Reconciliations for various aspects of a 403(b) plan should be prepared on a regular basis (e.g., monthly or quarterly, as well as annually).
   
  • Contributions should be reconciled from payroll records to the wire transfers or cash disbursement upon transmission of the contributions.
  • Contributions should be reconciled from payroll records to the investment statements.
  • Listings of distributions by participant should be reconciled with plan investment statements.
  • Total participant account balances (sum of all participant accounts) should be reconciled to total investments on a regular basis.
     
• Eligibility – Eligibility is an important factor to be considered in many aspects of a 403(b) plan. The plan sponsor needs to ensure that participants eligible to participate in the plan are notified on a timely basis of their eligibility and that only eligible participants are participating in the plan. It is also important that only eligible distributions, in the proper amounts, be distributed from the plan – whether the distribution is due to participants receiving loans, a “normal” distribution, or a hardship distribution. There are statutorily provided and plan-specific requirements for distributions; it is important to satisfy these requirements.
   
• Distributions – Distribution applications or reports should be reviewed. If the plan has vesting provisions, calculations supporting the distribution and forfeiture amounts should be reviewed and maintained. Any forfeiture should be used in accordance with the plan document.
   
• Compensation – In practice, compensation used in determining employee deferrals and employer contributions (if applicable) is often inconsistent with the compensation definition in the plan document. Controls should be in place to ensure that the compensation used to determine contributions is consistent with the plan document’s definition of compensation.
   
• Timeliness of Contributions – Participant contributions should be remitted to the plan within the remittance guidelines prescribed by the DOL. A DOL regulation requires that defined contribution plans, including 403b plans, remit employee contributions to the plan as soon as they can be reasonably segregated from the employer’s general assets. In no case can this amount of time exceed 15 business days after the end of the month in which the amounts were withheld. The 15-business day rule, however, is not a safe harbor rule. The DOL has interpreted “as soon as they can be reasonably segregated” as being as little as two days after amounts are withheld from participants’ compensation. A good rule of thumb is to remit contributions to the 403(b) plan within the same timeframe in which payroll taxes are remitted.
   
• Service Provider Monitoring – Typically, investment management and participant recordkeeping functions are outsourced to one or more service providers. The plan sponsor should complete a review of these service providers’ Report of Internal Controls and Tests of Operating Effectiveness (commonly referred to as SAS70 report) to ensure those providers have controls in place at their respective organizations and that those controls are operating effectively. A SAS70 report typically covers controls over the initiation of transactions, purchases and sales of investments, recording of investment income, and allocations to participant accounts. If a SAS70 report is available, it is important for the plan sponsor to review the report and follow-up on any exceptions noted (especially those exceptions related to allocations to participant accounts).
   
  • SAS70 reports also contain a “user controls” section. User controls are essentially the controls the service organization presumes the plan sponsor has in place. It is therefore critical that the plan sponsor review the user controls defined in the SAS70 report and ensure the applicable controls are in place and operating effectively at the plan sponsor.

The preceding controls are some, but not all, of the key controls a plan sponsor should have over its 403(b) plan. During a plan audit, auditors will be required to gain an understanding of these controls.

Auditing standards require auditors to communicate significant deficiencies in internal controls that come to their attention. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the plan’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the plan’s financial statements that is more than inconsequential will not be prevented or detected. Auditors must communicate these matters in writing to all individuals involved in overseeing the strategic direction and operations of the plan, in addition to the plan’s management.

As noted above, early consideration of the significant accounting procedures and internal controls could help the plan sponsors meet their fiduciary responsibilities over the plan, comply with the necessary reporting and disclosure requirements, and help make the audit more efficient. It would be beneficial to designate an individual at the plan sponsor to be responsible for overseeing the plan’s operation, ensuring the plan sponsor has the appropriate controls in place and that the plan complies with the reporting requirements of the DOL.

About the Authors
Theresa K. Banka, CPA, Plante & Moran, has more than 19 years of experience and is the firm-wide technical leader in employee benefit plan accounting and reporting matters, and in the development of the firm’s employee benefit plan financial audit approach. Theresa can be reached at 248.223.3572 or theresa.banka@plantemoran.com.

Lori J. Palmer, CPA, is assurance senior manager and benefit plan audit specialist, Plante & Moran. Lori is a leader of the firm’s employee benefit practice in Western Michigan and she assists in the development of the employee benefit plan financial audit approach. She has 12 years’ experience providing benefit plan services to clients and manages audit- and tax-related assignments for defined benefit, defined contribution, and health and welfare plans. Lori can be reached at 231.932.5640 or lori.palmer@plantemoran.com.