Editor’s Note: This is part 1 of a 2-part series.
On Dec. 4, 2018, the IRS issued Notice 2018-95 to provide relief to plan sponsors who improperly excluded part-time employees from participating in their 403(b) plan. Following is Part I of a two-part series; this installment focuses on universal availability rule for 403(b) plans.
Universal Availability Rule for 403(b) Plans
Internal Revenue Code Section 403(b)(12)(A) provides that, in general, pre-tax salary reduction deferrals and Roth 403(b) contributions (if permitted under the 403(b) plan) (collectively, “deferral contributions”) are subject to the “Universal Availability Rule.” This rule is satisfied only if the 403(b) plan permits every eligible employee (subject to limited exceptions) to have the opportunity to make deferral contributions of at least $200 annually. In order to satisfy the Universal Availability Rule, a 403(b) plan sponsor must provide every eligible employee with a notice informing them of the opportunity to make or change deferral contributions elections, the time for making those elections, the maximum amount permitted, and any additional conditions on those elections. This notice must be provided at least once each plan year.
One of the permissible exclusions to the Universal Availability Rule is the category of employees who normally work less than 20 hours per week. If a 403(b) plan document permits this exclusion, it must apply the rule equally to all employees (known as the “consistency requirement”). In other words, a 403(b) plan sponsor is not permitted to apply the less than 20 hours per week exclusion to one group of employees, but not to another group of employees.
When the IRS issued final Section 403(b) regulations on July 23, 2007, those regulations provided additional guidance on determining whether an employee worked less than 20 hours per week.
According to these final regulations, an employee is considered to work fewer than 20 hours per week only if:
- For the 12-month period beginning on the date the employee’s employment began, the employer reasonably expects the employee to work fewer than 1,000 hours of service in such period; and
- For each plan year ending after the close of the 12-month period beginning on the date the employee’s employment began (or, if the plan provides, each subsequent 12-month period), the employee worked fewer than 1,000 hours of service in the preceding 12-month period.
In 2013, the IRS issued Revenue Procedure 2013-22, which opened a pre-approval program for 403(b) plans and included sample language that could be leveraged by filers seeking IRS approval of a 403(b) plan document. Under this IRS pre-approved program, the IRS permitted 403(b) plan sponsors to restate their current 403(b) plan document retroactively to 2010, provided that the employer had adopted a written 403(b) plan no later than 12/31/2009. An employer adopting a pre-approved 403(b) plan document retroactively to 2010 will have reliance that the 403(b) plan document, in form, meets the requirements of Internal Revenue Code Section 403(b) and the IRS regulations.
The IRS’ 403(b) sample language addressing the exclusion of part-time employees under the “fewer than 20 hours per week” rule states:
“Once an Employee becomes eligible to have Elective Deferrals made on his or her behalf under the Plan under this standard, the Employee cannot be excluded from eligibility to have Elective Deferrals made on his or her behalf in any later year under this standard.”
Thus, if a 403(b) plan has this provision and an employee completes 1,000 hours of service in any year, then the employer must allow that individual to participate in the 403(b) plan in any later year, regardless of the number of hours of service that individual subsequently completes. This is known as the “once in, always in” rule. That is, the only way that an employee could be excluded as having worked “fewer than 20 hours per week” is if that employee never completed at least 1,000 hours of service in any year, known as an “exclusion year.”
ABC School’s 403(b) plan document excludes employees from making elective deferrals if the employee works fewer than 20 hours per week. Ms. Y, a teacher at ABC school, is hired in 2014 and is not permitted to participate in the ABC 403(b) plan in 2014 since she is reasonably expected to complete less than 1,000 hours of service per year. However, in 2014, Ms. Y completes 1,050 hours of service. Since Ms. Y completed more than 1,000 of service in 2014, she must be permitted to make elective deferrals to the ABC 403(b) plan in all subsequent years, regardless of the number of hours she subsequently performs under the “once in, always in” rule. Additionally, ABC School must remember to provide Ms. Y, as an eligible employee, with the annual Universal Availability Notice informing her of the opportunity to participate in the school’s 403(b) plan.
This “once in, always in” rule took many practitioners and plan sponsors by surprise as the IRS Section 403(b) regulations were ambiguous about application of this rule in determining whether an employee met the 1,000 hour requirement in any year.
Lynn Knight, CEBS, is a Senior Advanced Consultant at Voya Financial and a member of Technical Services for Tax-Exempt Markets there as well. Lynn has worked extensively in the retirement plan field for a broad spectrum of defined contribution plans, including 403(b), 401(k) and 457(b) plans, both at law firms and with retirement service providers.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
*Lynn is not a practicing attorney for Voya Financial.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.