IRS Relief for Improper Exclusion of Part-Time Employees from 403(b) Plan Participation, Part II

Lynn Knight

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 II of a two-part series; this installment focuses on relief provided under Notice 2018-95. Part I is available here.

IRS Relief Provided under Notice 2018-95

IRS Notice 2018-95 provides relief to employers who may not have operated under the “once in, always in” rule. According to this Notice, a 403(b) plan with a provision to exclude employees working less than 20 hours per week will not be considered noncompliant if it did not consider such employees eligible to participate in the 403(b) plan on an ongoing basis once those employees first completed 1,000 hours of service. The Notice includes a “Relief Period” and a “Fresh Start Opportunity.”

1. Relief Period

The Relief Period begins with the 2009 taxable year and ends on the last day of the exclusion year that ends before December 31, 2019. Alternative rules apply to 403(b) plans that determine whether an employee is excluded from participating in the 403(b) plan based on the employee’s anniversary date rather than a plan year. During the Relief Period, a 403(b) plan will not be treated as noncompliant if it has not operated under the “once in, always in” rule. However, relief will not be granted to a 403(b) plan that excluded an employee from participating in the 403(b) plan in a year where that employee had completed at least 1,000 hours of service in the immediate preceding year. In addition, the IRS will not grant relief in the case where a plan violated the consistency requirement.

Plan Document Language During the Relief Period

If an employer adopts an IRS pre-approved 403(b) plan document retroactively to 2010 , the IRS will not consider the plan’s operations to be inconsistent with the terms of its plan document during the Relief Period (2009 – 2018) for improperly excluding employees under the “fewer than 20 hours per week” rule. Pre-approved 403(b) plans have plan language already contained in the document beginning with the 2009 year. The IRS will not require the employer to amend its plan document to reflect the plan operation.

Although the IRS does not have an approval program for individually designed 403(b) plans, the IRS notes that a 403(b) plan sponsor with an individually designed plan that excludes part-time employees under the “fewer than 20 hours per week” rule and had not properly applied the “once in, always in” rule is permitted to retroactively correct its plan document language by amending its plan document language to reflect the plan’s operation no later than March 31, 2020.

After the Relief Period ends, sponsors of both IRS pre-approved 403(b) plan documents and individually designed 403(b) plans applying the “fewer than 20 hours per week” rule must ensure that their plan document properly reflects the “once in, always in” rule.

2. Fresh Start Opportunity

In order to take advantage of the relief, a 403(b) plan that operates its plan year on a calendar year and has the “fewer than 20 hours per week” exclusion must properly apply the “once in, always in” rule effective starting with the 2019 plan year. A 403(b) plan using the fresh-start method will not be considered out of compliance if it applies the “once in, always in” rule as if it first became effective on 1/1/18. This means that a 403(b) plan may apply the “once in, always in” rule without regard to the fact that the first-year exclusion condition was not met for an employee who began employment before 1/1/18 or the fact that the preceding-year exclusion was not met for an employee in any exclusion year before the first exclusion year beginning on or after Jan. 1, 2018. Additional rules apply to 403(b) plan who operate under a non-calendar year plan year.

Plan Document Language Using the Fresh Start Opportunity

403(b) plan sponsors using either IRS pre-approved or individually designed 403(b) plans are not required to amend their plan documents to reflect the use of the Fresh Start Opportunity.

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.