Revisiting Universal Availability under the IRS 403(b) Pre-Approved Plans Program

Linda Segal Blinn

Under the Internal Revenue Code’s universal availability rules, all employees of an eligible employer must have the opportunity to make pre-tax deferrals (or, if permitted under the plan, Roth 403(b) contributions) to such employer’s 403(b) plan, with only a few limited exceptions. (403(b) plans of churches and qualified church controlled organizations are deemed to be nondiscriminatory, including satisfying the universal availability rule).

One of those permitted exceptions enables an employer to exclude employees who normally work fewer than 20 hours per week. To assist employers in understanding what “normally” fewer than 20 hours means, Treas. Reg. §1.403(b)-5(b)(4)(B)(iii) provides a safe harbor:

• For newly hired employees, the employee is performing at least 20 hours per week and must be given the opportunity to defer into the 403(b) plan if, measuring the 12-month period from the date of hire, the employer reasonably expects that employee to work at least 1,000 hours of service in that timeframe.

• For employees who have been with the employee for at least 12 months, the employee is performing at least 20 hours per week in the current plan year and must be given the opportunity to defer into the 403(b) plan if, looking back to the prior 12-month period, the employee performed at least 1,000 hours in that timeframe.

When the IRS issued Revenue Procedure (Rev. Proc.) 2007-71, public schools could exclude employees who normally worked fewer than 20 hours by adopting the eligibility provision of Section 2.1 of the model plan language for public schools:

“…However, an Employee who is a student-teacher (i.e., a person providing service as a teacher’s aid [sic] on a temporary basis while attending a school, college or university) or who normally works fewer than 20 hours per week is not eligible to participate in the Plan. An Employee normally works fewer than 20 hours per week if, for the 12-month period beginning on the date the employee’s employment commenced, the Employer reasonably expects the Employee to work fewer than 1,000 hours of service (as defined under section 410(a)(3)(C) of the Code) and, for each plan year ending after the close of that 12-month period, the Employee has worked fewer than 1,000 hours of service.”

The IRS 403(b) pre-approved plan guidance appeared to preserve this safe harbor rule. Section 8.06(2) of Rev. Proc. 2013-22 noted that a pre-approved 403(b) plan document — whether a prototype or volume submitter — “plan must satisfy the universal availability requirement with respect to elective deferrals described in Treas. Reg. §1.403(b)-5(b), unless the adopting eligible employer is a Church or QCCO.” And the IRS’ March 2013 List of Required Modifications 17 (Participant) tracked the safe harbor found in Treas. Reg. §1.403(b)-5(b)(4))(B)(iii).

But the March 2015 version of 403(b) List of Required Modification 17 (Participant) contained an additional sentence (italicized below), suggesting — at least for employers adopting a pre-approved 403(b) plan document — that the safe harbor for identifying employees who normally work fewer than 20 hours a week would no longer be a year-by-year determination:

“An Employee normally works fewer than 20 hours per week if, for the 12-month period beginning on the date the Employee’s employment commenced, the Employer reasonably expects the Employee to work fewer than 1,000 hours of service (as defined under section 410(a)(3)(C) of the Internal Revenue Code) in such period, and, for each Plan Year ending after the close of that 12-month period, the Employee has worked fewer than 1,000 hours of service in the preceding 12-month period. Under this provision, an Employee who works 1,000 or more hours of service in the 12-month period beginning on the date the Employee’s employment commenced or in a Plan Year ending after the close of that 12-month period shall then be eligible to participate in the Plan. 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.” (emphasis added).

If an employer adopts an IRS pre-approved 403(b) plan document and elects to exclude employees who normally work fewer than 20 hours a week from deferring into the 403(b) plan, the 403(b) plan will need to operate under a “once in, always in” standard. In other words, an employer who wants to determine which of their existing employees normally work at least 20 hours per week (and thus are eligible to defer into the 403(b) plan) on a year-by-year basis will need to operate under an individually designed 403(b) plan document because this practice does not appear to be permissible under the pre-approved plan requirements.

The redlined 403(b) List of Required Modifications, comparing changes from March 2013 to March 2015, can be found at https://www.irs.gov/pub/irs-tege/403b_lrm0315_redlined.pdf.

Stay tuned for a follow-up article on the “once-in, always-in” rule and its impact on the recently released 403(b) plan approvals as well as what IRS auditors will be looking for under this rule.

Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.

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.

* Linda 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.