The IRS has updated the information it provides concerning the universal availability requirement for 403(b) plans. The information is contained on the IRS website, with hyperlinks to additional resources.
Regarding elective deferrals, a 403(b) plan must meet the requirements of Internal Revenue Code Section 403(b)(12)(A)(ii), also known as the universal availability rule. Under this rule, if any employee has the right to make an elective deferral, then all employees of that employer must be eligible to do so. This includes the right to designate elective deferrals as designated Roth contributions.
Note that universal availability for elective deferrals does not apply to a church, as defined in Code Section 3121(w)(3)(A), or a qualified church-controlled organization, as defined in Code Section 3121(w)(3)(B).
Effective Opportunity. Employees who are eligible to make elective deferrals must be given an effective opportunity to participate. Whether the employee has an effective opportunity is determined by all of the facts and circumstances, including:
- notice of eligibility;
- the period of time an election may be made; and
- any other conditions on elections.
At least once during a plan year, the plan must provide an employee—whether part-time or full-time—with an effective opportunity to make or change an elective deferral election, up to the dollar limit in effect, including any catch-up deferrals and Roth contributions the plan permits.
Employees Who May—or May Not—Be Excluded
The IRS warns that it is a common mistake to automatically exclude employees who work less than full-time from making elective deferrals under the 403(b) plan. In addition, it is a mistake for a plan that is subject to Code Section 401(a), a 403(b) plan to exclude employees based on a generic classification such as:
- substitute teacher;
- adjunct professor; and
- collectively bargained employee.
However, if these employees normally work less than 20 hours per week, they may be excluded because of that. More specifically, the employees who may be excluded from eligibility include non-resident aliens described in Code Section 410(b)(3)(C) and employees who are eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer. The following employees may be excluded as well.
Employees who normally work less than 20 hours per week. If any employee who falls under this exclusion has the right to make elective deferrals, then no employee who falls under such exclusion may be prevented from making elective deferrals.
The IRS provides more discussion of what “normally works less than 20 hours per week” means:
An employee normally works less than 20 hours per week only if during the 12-month period beginning on the date employment began (the initial year), the employer reasonably expects the employee to work fewer than 1,000 hours, and for each plan year ending after the close of the initial year (or, if the plan provides, each subsequent 12-month period), the employee works fewer than 1,000 hours of service. Thus, once an employee does not meet the part-time exclusion conditions for any year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion in any subsequent year.
However, the IRS adds, certain 403(b) plans may be eligible for transition relief from this requirement under Notice 2018-95. And, it says, a plan also may apply a threshold lower than 20 hours per week.
Students performing services described in Code Section 3121(b)(10). If any employee who falls under this exclusion has the right to make elective deferrals, then no employee who falls under such exclusion may be prevented from making elective deferrals.
Compliance Best Practices
The IRS suggests that in order to better comply with the rule, an employer should:
- Review plan language for excluded employees.
- Verify the plan provides an effective opportunity to participate for all non-excludible employees.
- Review whether the plan may be eligible for transition relief under Notice 2018-95.
- Log in to post comments
Do we know how Universal Availability works with the long term part time employee eligibility rules from the SECURE Act? Only 401ks are subject to the Long Term Part Time rules. Do we expect SECURE Act 2.0 to close this gap between 401k and 403b?