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IRS Updates 403(b) Universal Availability Application Info

The IRS has updated the information it makes available concerning the 403(b) universal availability requirement. The update centers on a refreshed example illustrating its application to a current scenario.

A 403(b) plan must satisfy the universal availability requirement regarding elective deferrals. Under the requirement, if any employee has the right to all make an elective deferral, then all employees must be eligible to do so. There are certain limited exceptions:

  • non-resident aliens described in Internal Revenue Code Section 410(b)(3)(C); and

  • employees eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer.

Employees who normally work less than 20 hours per week and students performing services described in Code Section 3121(b)(10) also are excluded. But if any employee who falls under one of these exclusions has the right to make elective deferrals, then no employee who falls under such an exclusion may be prevented from making elective deferrals.

The IRS elaborates on the 20-hour threshold on the page, and the new example centers on it:

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.

For example, suppose that John is hired on Aug. 25, 2015, and the 403(b) plan year ends on Dec. 31. Assume it is reasonable to expect that John will normally work a total of 17 hours per week. John works 800 hours in the first 12 months of employment and 850 hours during the plan year ending after the initial year as follows:

  • Initial year of employment, Aug. 25, 2015-Aug. 24, 2016: 800 hours

  • Plan year ending after initial year of employment, Jan. 1, 2016-Dec. 31, 2016: 850 hours

If the 403(b) plan provides an exclusion for employees who normally work less than 20 hours per week, John may be excluded for purposes of making elective deferrals under the plan.

However, if John works 1,000 hours in any subsequent plan year he will become eligible to make elective deferrals and must be given the opportunity to do so. Once he meets the 1,000 threshold, he can no longer be excluded under the “normally work less than 20 hours per week” criterion, even if his hours drop to less than 1,000 in a subsequent year.