Advisory Committee on Tax Exempt and Government Entities (ACT ...

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PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCEImpact of SizeDue to limited resources, lesser expertise and a lower level of awareness of IRSprograms, compliance challenges are most pronounced in the small plan market. Thesechallenges are likely exacerbated by the volume of statutory changes since 2001.Within the public K-12 segment of the 403(b) market, which comprises 14,000 schoolsystems, 75% of employers have 500 employees or less. In a recent survey only 11% ofpublic K-12 plan sponsors considered themselves to be very familiar with 403(b)regulations, a number that dropped to 4% among employers with fewer than 100employees 22 .Multiple Plans Offered by One EmployerGovernmental employers that offer multiple categories of plans appear to be the rulerather than the exception. At a minimum, most large State and local governments offera defined benefit plan and an optional 457(b) deferred compensation plan. In the publicK-12 market, it is estimated that, in addition to offering a DB plan, 40% of employersoffer two or more defined contribution plans 23 . While some jurisdictions have set up asingle agency to administer all categories of plans, anecdotal evidence suggests thataccountability for plan administration is disbursed across different agencies in mostother jurisdictions. Interaction among these agencies is required to ensure adherence torules governing contribution limits, purchase of permissive service credits and planloans across different categories of plans.IV.Results of Data GatheringThe ACT engaged in the development and analysis of extensive backgroundinformation from both the IRS TE/GE Division as well as from outside parties to developits recommendations. The collection of background information focused on threecommunities involved in the design, operation and regulation of governmental definedcontribution plans: (1) organizations and practitioners that administer governmentalplans (“service providers”), (2) governmental employers that adopt and operate plansand (3) the IRS.The following means were used to gather information:• Issuance of Surveys and Publication of Industry Articles• Outreach to plan sponsors, industry consultants and other service providers• Aggregation of data from industry publications, reports and statistical analyses• Consultation with IRS senior management22 State of the 403(b) and 457 Marketplace, Challenges and Opportunities, Cerruli Associates, 200723 State of the 403(b) and 457 Marketplace, Challenges and Opportunities, Cerruli Associates, 2007ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 12
PROTECTING PLAN BENEFITS:IMPROVING GOVERNMENTAL DEFINED CONTRIBUTION PLAN COMPLIANCESurveys and ArticlesBenefits Link Governmental 401(a) Defined Contribution Plan SurveyThe ACT considered it important to attempt to obtain information from the employers,service providers, and organizations which either adopt or support government plans.To that end, the ACT posted a survey on the BenefitsLink website in the spring of 2007.BenefitsLink is a website which caters to the employee benefits community. It is asource of benefits information and it also offers a forum for discussion and analysis ofvarious plan-related issues. The site is frequented by employers sponsoring plans, aswell as the professionals who provide legal counsel or administrative and testingservices to plan sponsors.While many of the respondents were not employers sponsoring government plans, theywere professionals who work closely with such employers and are therefore familiarwith the issues confronting them. The survey asked respondents to providerecommendations to improve document and operational compliance in thegovernmental sector with a specific focus on 401(a) plans. The questionnaire andresponses are included in Appendix B to the report.The following are examples of compliance challenges identified in the survey:• Plans failed to cover all eligible employees• Plan documents never amended, especially when specimen plans were used• Plan documents were improperly amendedRespondents made the following suggestions to improve operational or plan documentcompliance for sponsors of governmental 401(a) defined contribution plans:• Suggested that the IRS create a pre-approved plan program forgovernmental 401(a) defined contribution plans• Suggested that IRS communications include cautions about usingspecimen plans, since these plans often are not often kept current with taxlaw changes, unless a practitioner, law firm or consultant is involvedOther Surveys and ArticlesIn addition to issuing the governmental defined contribution 401(a) survey throughBenefits Link, the ACT publicized the same survey on the National Association ofGovernmental Contribution Administrators (NADGCA) web site in March 2007, includedan article regarding the ACT’s governmental plan recommendations for publication inthe April 4, 2008 NAGDCA newsletter and issued an announcement through theNADGCA Listserv in late April 2008. Although the ACT received a modest level ofresponses from these publications, the partnership with NAGDCA provided anopportunity to publicize the ACT’s activities within the governmental plan communityADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 13
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