The 403(b) industry has seen a lot of changesover the past nine years. But even with all the regulatory changes,the Internal Revenue Service and the Department of Labor havegiven non-profit organizations a lot of time to bring their plansinto compliance.

However, it now looks like the tide may be shifting and we'restarting to see a tightening of the regulatory reins.

To begin with, the IRS has announced their priorities for2016.

Citing what it calls a “historical pattern of non-compliance,”the Employee Plans division will be doing a review of 403(b) and457(b) plans of tax exempt organizations starting in 2016. Whilethis has been a threat for several years, it is now on the prioritylist.

Even prior to the announced 2016 initiative, I recently heardabout a situation involving a small 403(b) plan that illustratesthis very well. The plan sponsor did not work with an advisor.

One of the board members had some financial background, butreally just enough to be dangerous. And the organization'sexecutive director had only a vague knowledge of some planrequirements.

Then the organization received an IRS audit notice. Fortunately,the executive director quickly turned to an advisor he knew from alocal leadership group.

The advisor helped them determine that there was no plandocument. In addition, the plan had not filed a Form 5500, despitethe fact that it clearly could not fall within the DOL safe harborfor ERISA exemption. Compliance oversight and governance werenon-existent.

The advisor guided the plan sponsor on what needed to be done toget into compliance prior to the IRS audit.

Because they were proactive and worked closely with the auditor(who saw the efforts they were making), the auditor was kind andhelpful. And in the end, there were no fines or penaltiesassociated with the audit.

As a result of the advisor's outstanding work, he was then hiredto update and modernize the plan. Automatic provisions wereimplemented, participant education was overhauled, investments wereupdated and governance and compliance procedures were put intoplace. It turned out well for all.

The moral of this story?

If your client sponsors a 403(b) plan, have them get their ducksin a row—and fast. The auditor told this particular plan sponsorthat they were flagged due to a reported pension contribution ontheir Form 990—yet there was no 5500 filing. Clearly, regulatorsare already looking.

The smartest thing the executive director did was to seek helpfrom an advisor.

If he hadn't, the results of that audit might have beenvery different.

According to the most recent Profit Sharing Council of America403(b) plan survey, over half of small 403(b) plans don't use anadvisor. That means there are likely a significant number ofregulatory enforcement disasters waiting to happen.

The good news, however, is that plan sponsors need not beoverwhelmed by the requirements. There are many excellent advisorswilling to help them. They just can't wait until the IRS comesknocking!

You can read more from Aaron on blog.principal.com

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