IRS Provides Do-Over for 403(b) Plans Not Following Once-In-Always-In Condition

Industry comment letters argued that many 403(b) plan sponsors were unaware of the rule that once a part-time employee is eligible to make elective deferrals, he cannot be excluded from the plan in subsequent years.

The IRS has issued Notice 2018-95, which provides transition relief from the “once-in-always-in” (OIAI) condition for excluding part-time employees from 403(b) plan eligibility under Section 1.403(b)-5(b)(4)(iii)(B) of the Treasury Regulations. 

Under the OIAI exclusion condition, for a 403(b) plan that excludes part-time employees from making elective deferrals, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that the employee is a part-time employee.

The IRS explained that when it announced the opening of document submissions for its 403(b) pre-approved plan program, it issued a List of Required Modifications (LRM) which included the OIAI condition. However, commenters requested transition relief with respect to the OIAI condition, stating that many employers were not aware that the part-time exclusion included that condition.

Commenters noted that the OIAI condition was not specifically highlighted in writing until the 2015 LRMs were issued, and that, even then, the LRMs were directed at drafters of pre-approved plans and not adopting employers or sponsors of individually designed plans. As a result, the commenters argued, many 403(b) plan sponsors did not follow the OIAI condition.

So, the Treasury Department and the IRS are providing transition relief from the OIAI condition, including relief regarding plan operations for a transition period referred to as the “Relief Period,” relief regarding plan language, and a fresh-start opportunity after the Relief Period ends. The Relief Period begins with taxable years beginning after December 31, 2008, (the general effective date for the 403(b) regulations). For plans with exclusion years based on plan years, the Relief Period ends for all employees on the last day of the last exclusion year that ends before December 31, 2019.  For plans with exclusion years based on employee anniversary years, the Relief Period ends, with respect to any employee, on the last day of that employee’s last exclusion year that ends before December 31, 2019.

During the Relief Period, a plan will not be treated as failing to satisfy the conditions of the part-time exclusion merely because the plan was not operated in compliance with the OIAI condition. 

The Notice offers examples of the relief provided. 403(b) plan sponsors have until March 31, 2020, to adopt a pre-approved plan document and to make sure their plan has been operating in accordance with the plan terms.