Some sponsors of 403(b) plans may not be aware that a “universal availability” rule applies requiring the plan to permit all employees of the sponsoring employer to make salary deferrals to the plan, with certain exceptions. Those unknowing employers may have just received a holiday gift in the form of relief from the IRS. On December 4, 2018, the IRS issued Notice 2018-95, which clarifies the application of the universal availability requirement to part-time employees working fewer than 20 hours per week.
Background on the Universal Availability Rule
Tax exempt organizations can choose to establish a 403(b) or a 401(k) plan (or both). 401(k) plans are subject to certain nondiscrimination testing rules, whereas 403(b) plans are not. However, Code Section 403(b) essentially provides that if the plan permits any employee to make salary deferrals, all employees must be permitted to make salary deferrals. Certain employees may be excluded, including:
- Employees who normally work less than 20 hours per week;
- Certain students;
- Non-resident aliens; and
- Employees who are eligible to make elective deferrals under another 401(k), 403(b), or 457(b) plan sponsored by the same employer.
An employee is treated as normally working 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. This period is sometimes referred to as the “exclusion year.”
The “Once-In-Always-In” Rule and Relief
Under applicable Treasury regulations, once an employee works 1,000 hours or more during the preceding year, that employee cannot be excluded from making elective deferrals going forward. This is referred to as the “Once-In-Always-In” rule (“OIAI”).
In response to comments indicating that many employers did not understand or apply the OIAI exclusion condition correctly, the IRS has granted temporary relief. To be eligible for the relief, employers may have applied the exclusion incorrectly, but must have applied that interpretation consistently from year-to-year and from employee-to-employee. The relief is granted starting with the employer’s first tax year beginning after December 31, 2008 and through the last exclusion year ending before December 31, 2019. For plans that use the calendar year as the exclusion year, this means that the relief ends December 31, 2018.
Therefore, it is imperative that employers immediately rectify any improper part-time employee exclusion before January 1, 2019.
Plan Document Relief
Employers with pre-approved 403(b) plans that do not properly describe the OIAI rule are treated as having an operational error. However, the IRS is not requiring a plan amendment for pre-approved plans. Employers with individually designed 403(b) plans that do not properly describe the OIAI rule have until March 31, 2020 to amend the plan to properly reflect the rule.
“Fresh Start” Relief
Essentially, employers can use 2018 as a “fresh start” exclusion year. If a part-time employee previously worked 1,000 hours or more, but did not do so in 2018, they do not need to be offered the opportunity to make salary deferrals in 2019.
Given the looming deadlines, any employer that has a 403(b) plan with a part-time employee exclusion should carefully and quickly evaluate its plan document and operation to ensure compliance with the universal availability and OIAI rules. Employers might consider eliminating any part-time exclusion in light of the administrative difficulties in administering the exclusion and the minimal cost savings it might provide. Allowing all employees the ability to make elective deferrals may be an appropriate and simpler practice for many 403(b) plan sponsors.