“1. A client is monitoring hours each payroll and sees in March of a calendar year that an employee has worked 25 hours in a given week, is that employee eligible at the time?
“2. We see at the end of the plan year that an employee has worked more than 1000 hours in that plan year. Since that employee was not given an opportunity to defer, does the employer have to contribute an assumed deferral amount and the corresponding match for that employee?”
Michael A. Webb, Vice President, Retirement Practice, Cammack LaRhette Consulting, answers:
To answer your questions, it is important to look at the actual definition of an employee who works fewer than 20 hours per week. The definition, as found in Treas. Reg. 1.403(b)-5(b)(4)(ii) is as follows:
(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. (See, however, section 202(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and regulations under section 410(a) of the Internal Revenue Code applicable with respect to plans that are subject to Title I of ERISA.)
Now that we have laid out the definition, we can begin to address your examples. For your employee who works 25 hours in a particular week, you can see that the definition measures 12-month periods of service, so clearly working 25 hours in a week does not impact whether or not he or she works fewer than 20 hours per week under the definition. Assuming the employee was reasonably expected to complete less than 1,000 hours of service in his/her initial 12 months of employment, you would need to wait until the end of the plan year (or anniversary year, if the plan elects) and see if the 25 hours was nearly an anomaly, or if the employee actually worked 1,000 hours. If the latter, the employee would then become eligible to make elective deferrals on day one of the following plan year (or anniversary year, as the case may be).
As for your employee who actually worked 1,000 hours in a plan year, assuming the plan utilizes a plan year definition as opposed to anniversary year in your example, the employee, per clause (2) of our definition, becomes eligible to make elective deferrals going forward (“for each plan year ending AFTER the close of the 12-month period beginning on the date the employee’s employment commenced”), not retroactively, so no prior year correction is required.
The experts concur with your assessment that the enforcement of this 20 hour-per-week restriction in practice can be a significant administrative burden, and that perhaps the plan sponsor might wish to consider allowing such employees to make elective deferrals to their 403(b) plan, especially since there is no requirement that EMPLOYER contributions be made for such employees until they actually satisfy the eligibility rules of the 403(b) plan in question.
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.