403(b) plans are retirement plans similar to 401(k) plans but they are established for non-profit organizations and employees of public school systems. They have traditionally been known by other names such as tax-sheltered annuities or tax-deferred annuities. Recent changes to IRS and DOL regulations requires 403(b) plans to have a written plan document and be subject to the form 5500 filing requirements like a 401(k) plan. These new regulations became effective beginning January 1, 2009. The Form 5500 generally requires plans with 100 or more participants (subject to the 80-120 participant rule) to attach separate audited financial statements and certain supplemental schedules.
Although 403(b) plans and 401(k) plans are similar, there are some significant differences between these plans in areas such as participant eligibility, trust requirements, funding requirements, catch up contributions, contributions for terminated employees, ADP/ACP testing and prototype plans just to name a few.
Auditors of 403(b) plans must be familiar with special requirements of these types of retirement plans (similar to 401(k) special requirements), but they also have special challenges because of the recent change in regulations. Potential difficulties include:
- Allocated contracts and participant loans
- Absence of plan accounting
- Contract accounting
- Participant-directed transfers
- Former employees
Such issues provide a challenge to 403(b) plan audits, especially for the initial audit of the plan.