“Therefore, in all 403(b) plans today, employees must be immediately eligible to defer but the plan sponsor can put an eligibility requirement on the match. Is this correct?”
Mike Webb, Vice President, Retirement Cammack LaRhette Consulting, answers:
You are generally correct, but, as is the case with most regulations, there are exceptions to the general rule.
Unlike 401(k) plans, which allow eligibility requirements such as a waiting period to be imposed with respect to elective deferrals, 403(b) plans generally allow all employees the right to make elective deferrals to the plan upon date of hire, in what you label accurately as the Universal Availability requirement. Over the years, several exceptions have evolved to the Universal Availability rule, most notably for collectively bargained employees.
However, the final 403(b) regulations eliminated the collectively bargained exception and restricted the exclusions from the right to make elective deferrals to the following groups:
- Employees who will contribute $200 or less annually;
- Employees who participate in a 401(k) or 457(b) plan, or in another 403(b) plan;
- Nonresident aliens with no U.S. source income;
- Employees who normally work less than 20 hours per week (note that hours MUST be tracked in order to administer this exclusion); and
- Students performing services described in Code §3121(b)(10) (generally, those enrolled in a post-secondary educational institution performing services for that institution).
Even these narrow existing exclusions are somewhat difficult to administer in practice, since, if only one person from an excluded class is included, even inadvertently, all employees from that classification must be permitted to make elective deferrals to the plan. Thus, as a practical matter, many plan sponsors choose to allow all employees the right to make elective deferrals upon date of hire.
As for employer contributions, eligibility restrictions, such as age and/or service requirements, may be imposed in a manner similar to that of qualified plans such as 401(k) plans, provided that such restrictions are not discriminatory in a manner that causes the plan to fail coverage testing under Code Section 401(a)(4). Historically, there were some differences as to how the nondiscrimination rules applied to 403(b) plans as opposed to 401(k) plans, but these differences were essentially eliminated by the final 403(b) regulations.
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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