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A Solution to What Shouldn’t be a Problem? IRS Provides Some 403(b) Universal Availability Relief

Over eight years ago, in a PLANSPONSOR Ask the Experts column, I suggested to plan sponsors that all employees be permitted to make elective deferrals to a 403(b) plan (a concept the IRS calls “Universal Availability”), despite the fact that certain employees could be prohibited from making these deferrals under the 403(b) regulations.

Why did I suggest this? Because the provisions that allow certain employees to be excluded from the right to make elective deferrals are difficult, if not impossible, to administer, particularly with respect to part-time employees. And, of course, since only elective deferrals are involved (and not employer contributions), the cost of permitting these employees to make elective deferrals is minimal.

Apparently some plan sponsors found out the hard way that excluding certain part-time employees was a bad idea, as the IRS recently issued Notice 2018-95 to provide relief for what commenters termed “many” employers that made mistakes in this area. Specifically, plan sponsors ignored what is known as the “Once in Always In” (OIAI) provision, which states that once a part-time employee satisfies the hours-worked requirement to make elective deferrals, he or she must be eligible to make elective deferrals in future years EVEN IF he or she fails to satisfy the hours-worked requirement in future years.

The Notice provides some temporary relief from this OIAI requirement until 12/31/19 for most plans (a slightly shorter relief period applies to plans that use employment anniversary years to determine eligibility). But once 2020 rolls around, we will be back to business as usual regarding the rules.

And what are the rules? Okay, try not to fall asleep reading the following, which is taken directly from the Notice:

“First-year, preceding-year, and OIAI exclusion conditions. Section 1.403(b)- 5(b)(4)(iii)(B) provides the following rules regarding the part-time exclusion: [A]n employee normally works fewer than 20 hours per week if and only if— (1) 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 in section 410(a)(3)(C)) in such period; and (2) For each plan year ending after the close of the 12-month period beginning on the date the employee's employment commenced (or, if the plan so provides, each subsequent 12-month period), the employee worked fewer than 1,000 hours of service in the preceding 12-month period.

Thus, the provision imposes three separate conditions for an employee to be excluded from making elective deferrals under the part-time exclusion: (1) a “first-year” exclusion condition, (2) a “preceding-year” exclusion condition, and (3) the OIAI exclusion condition. Under the first-year exclusion condition, in order to exclude the employee from making elective deferrals, the employer must reasonably expect the employee to work fewer than 1,000 hours during the employee’s first year of employment. Under the preceding-year exclusion condition, in order to exclude the employee from making elective deferrals in an exclusion year ending after the first year of employment, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period. Under the OIAI exclusion condition, the employee may be excluded under the part-time exclusion if and only if, in the employee’s first year of employment, the employee meets the first-year exclusion condition, and, in each exclusion year ending after the first year of employment, the employee has met the preceding-year exclusion condition. The effect of the OIAI exclusion condition is that once an employee does not meet the part-time exclusion conditions, whether in the initial year of employment or for any exclusion year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion.”

Did you understand all that? If not, here are the cliff notes: the rules for excluding employees is a complicated three-part test that requires extensive counting of individual employee hours worked. I challenge any plan sponsor to administer it error-free.

Sometimes plan sponsors just make it hard on themselves by electing to administer impossible retirement plan provisions that provide minimal cost savings. This is one of those provisions. “Many” plan sponsors apparently felt otherwise, which is why the IRS had to create a temporary solution to a problem that should not have existed in the first place.

Unless there is a prohibitive administrative cost or another strong business case against it, allowing all employees the ability to make elective deferrals to a 403(b) is best practice for plan sponsors.

Do you exclude certain part-timers or other permitted classes of employees from the right to make elective deferrals to a 403(b) plan? Let us know on Twitter or at info@cammackretirement.com.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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