IRS Provides Relief for Once-in-Always-in Condition

The IRS has provided transition relief from the once-in-always-in (OIAI) condition for excluding part-time employees under Treas. Reg. §1.403(b)-5(b)(4)(iii)(B). The relief is contained in Notice 2018-95. It also has provided a fresh start opportunity for plans by applying the OIAI condition for exclusion years after the transition relief ends.

Under the OIAI exclusion condition, for a 403(b) plan that excludes part-time employees from making elective deferrals, once an employee is eligible to make them, he or she may not be excluded from making them in any later exclusion year because he or she is a part-time employee.

In 2013, the IRS released sample plan provisions in connection with the 403(b) pre-approved plan program. In 2015, in response to requests to clarify certain provisions, the IRS issued a revised listing of required modifications (LRMs) in connection with the program. These included the following additional sentence that specifically highlights the OIAI exclusion condition in the Treasury regulations:

Once an Employee becomes eligible to have Elective Deferrals made on his or her behalf under the Plan under this [part-time exclusion] 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.

The IRS received requests for transition relief regarding the OIAI exclusion condition, arguing that many employers were not aware that the part-time exclusion included it. In particular, they noted that the OIAI exclusion condition was not specifically highlighted in writing until the 2015 LRMs were issued, and that even then the LRMs were directed at drafters of pre-approved plans and not adopting employers or sponsors of individually designed plans. As a result, said commenters, many employers applied the first-year exclusion condition for an employee’s first year and the preceding-year exclusion condition separately for each succeeding exclusion year; however, they did not apply the OIAI exclusion condition.

The Relief

In response to these comments, the Treasury and the IRS are providing transition relief from the OIAI exclusion condition, including: 

• relief regarding plan operations for a transition period referred to as the “Relief Period”;
• relief regarding plan language; and
• a fresh-start opportunity after the Relief Period ends.

The Relief Period begins with taxable years beginning after Dec. 31, 2008 (the general effective date for the Section 403(b) Treasury regulations). For plans with exclusion years based on plan years, the Relief Period ends for all employees on the last day of the last exclusion year that ends before Dec. 31, 2019. For plans with exclusion years based on employee anniversary years, the Relief Period ends on the last day of an employee’s last exclusion year that ends before Dec. 31, 2019.

During the Relief Period, a plan will not be treated as failing to satisfy the conditions of the part-time exclusion:

• merely because the plan was not operated in compliance with the OIAI exclusion condition; nor
• during an employee’s overlap period if the plan has applied the first-year and preceding-year exclusion conditions regarding overlap periods in a reasonable and uniform way for all employees.

After the Relief Period ends and all plans comply with the OIAI exclusion condition, the IRS believes that such issues involving new employees and the overlap period will no longer arise. This is because, under the OIAI exclusion condition, once an employee does not meet the part-time exclusion conditions — whether in the initial year of employment or for any exclusion year — he or she may no longer be excluded from making elective deferrals under the part-time exclusion.

An employer with an individually designed plan has until March 31, 2020 to correct form defects in the plan. Under Notice 2018-95, if the operational relief applies, an employer may amend plan language through that date to reflect that the OIAI exclusion condition was not applied for all exclusion years, and that the amendment will be treated as a correction of a form defect during the remedial amendment period. Solely for purposes of the relief in Notice 2018-95, plan language that tracks the regulatory language of the part-time exclusion without explicitly highlighting the OIAI exclusion condition is treated as language that reflects that the OIAI exclusion condition was not applied. An employer’s eligibility for the Section 403(b) remedial amendment period will not be adversely affected merely because an employer uses the relief provided under the notice.

After the Relief Period

After the Relief Period ends, both 403(b) pre-approved plans and individually designed plans that provide for the part-time exclusion must include the OIAI exclusion condition in plan language. This OIAI exclusion condition language must be included in the plan, for periods after the Relief Period ends, by the end of the remedial amendment period.

In general, for exclusion years beginning on or after Jan. 1, 2019, a plan that provides for the part-time exclusion must apply the OIAI exclusion condition in both form and operation. However, the notice provides a fresh-start opportunity under which a plan will not be treated as failing to satisfy the conditions of the part-time exclusion for periods after the Relief Period if the OIAI exclusion condition is applied as if it first became effective Jan. 1, 2018. Thus, a plan may apply the OIAI exclusion condition by disregarding the fact that:

• the first-year exclusion condition was not met for an employee if she or he began employment before Jan. 1, 2018; or
• the preceding-year exclusion condition was not met for an employee in any exclusion year before the first exclusion year beginning on or after Jan. 1, 2018.

Nonetheless, even if a plan applies this fresh-start opportunity regarding the OIAI exclusion condition, the plan must have been operated during the Relief Period in compliance with the OIAI exclusion or in accordance with relief Notice 2018-95 provides. In addition, a plan — whether a 403(b) pre-approved plan or an individually designed plan — does not have to be amended to reflect the use of this fresh-start opportunity in applying the OIAI exclusion condition.

Limitations

Notice 2018-95 does not provide relief from the other conditions of the part-time exclusion; namely, the first-year exclusion condition and the preceding-year exclusion condition. It also does not provide relief from the consistency requirement.