403b Audits

403(b) Plans and Audit requirements

403b Plans, also known as tax-sheltered annuity (TSA) plans, are retirement plans covering employees of public schools, certain tax-exempt organizations and religious groups.  Named for Section 403(b) of the Internal Revenue Code, 403b Plans are the non-profit equivalent (and closely resemble) company sponsored 401k Plans.  Below we identify some of the similarities and differences between the two types of plans:

403(b) vs. 401(k) - Similarities

  • Both are advantageous in that employees do not pay income taxes on contributions made to the plans until they begin to take withdrawals in the form of distributions. 
  • Both allow after tax (Roth) contributions at the election of the Plan Sponsor.
  • Both allow employers to elect to make matching contributions.
  • Both allow participants to take loans against their vested balances - if the Plan Sponsor designates that loans are allowable in their specific plan.

403(b) vs. 401(k) - Differences

The investment options available to a 403b participant are a little more confined than what is available to 401k plan participants.  In a 401k Plan, a participant may be able to maintain a self-directed brokerage account (SDBA) - if this feature is allowed by the Plan Sponsor.   Utilizing a SDBA, the participant can invest in almost any readily tradable security and would be able to invest directly in shares of individual stocks.  Conversely, in a 403b Plan, the investment options are limited and must take the form of mutual funds or annuity contracts sponsored by insurance companies.

Other differences:

  • The employer's contribution to a 403b plan can be withdrawn without penalty if it invested in an annuity.
  • 403b plans have some unique contribution rules.  If you have worked for the Plan Sponsor for over 15 years, you qualify for the 15-year rule and your elective deferrals under this limit can be as high as $19,500 (versus $16,500 in a 401k Plan).

403(b) Audit requirements

Until recently, 403b Plans were exempt from some of the regulations governing 401k Plans - including the annual audit requirement dictated by the IRS Form 5500 for large retirement plans.  Effective for Plan years beginning after January 1, 2009, 403b Plans are now subject to the same reporting and audit requirements that exist for 401k and other pension plans. 

If a Plan is determined to be a “large” plan, a 403b audit is now required.  The number of eligible participants determines if a plan is classified as a large or small plan.  In the first year of operations, the cutoff for classification is easy - under 100 eligible participants equates to a small plan and plans with 100 participants or more are classified as large plans.  After year one, the 80 - 120 Rule  comes into play.

If you have questions regarding your Plan or if you are in need of audit assistance, please call us today!

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