403(b) plans - Eligibility for Deferrals and Universal Availability Rules

TIP OF THE DAY

By Stephanie Reagan

sreagan@sunlin.biz

In general, all employees of the employer must be allowed to defer compensation into a 403(b) plan when hired. There are only a few eligibility exclusions available:

  • Nonresident aliens with no U.S. source income.

  • Students performing services under a work-study program.

  • Employees eligible to defer to a 401(k) or 457(b) plan of the same employer.

  • Employees whose normal work week is less than 20 hours. Note that even ERISA-covered 403(b) plans can exclude employees who normally work fewer than 20 hours per week as long as the employee has not worked more than 1,000 hours in any previous plan-computation period and such language is provided in the plan document.

Accordingly, unless the employee is in one of the above categories, he or she must technically have been actually offered that right by the employer providing a "meaningful notice" of that right and the employee is informed of the timing requirements for making and changing deferral elections.

The IRS' Employee Plans Compliance Unit's (EPCU) current audit project is focused on education organizations sponsoring 403(b) plans and their satisfaction of Universal Availability non-discrimination rules and new plan-document requirements. The IRS is focused on this 403(b) plan issue because their statistical information indicates that 8 out of 10 schools' 403(b) plans have incorrectly excluded substitute teachers and other part-time workers. Also, more than 1 out of 7 college and university 403(b) IRS plan audits find that adjunct professors have been incorrectly excluded from participation.  Failure to satisfy Universal Availability is a recurring issue in IRS 403(b) plan audits and has consistently landed high on the list of top 10 operational deficiencies discovered by the IRS.

Universal Availability violations left undetected can be very costly for the plan sponsor to correct.  Under the IRS' self-correction program, plan sponsors are generally required to make a QNEC contribution to the plan, for all of the eligible employees who were not provided the option to defer, in the amount of 50% of the employee's “missed deferral.”

 

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