In an updated Issue Snapshot on the IRS website, the agency notes that a 403(b) plan must satisfy the universal availability requirement with respect to elective deferrals.
All employees of the employer must be eligible to make elective deferrals if any employee has the right to do so, with certain limited exceptions. Certain part-time employees, for example, may be excluded from eligibility to make elective deferrals.
As a reminder, the Issue Snapshot says certain employees may be excluded, including:
- Employees who normally work less than 20 hours per week;
- Students performing services described in Internal Revenue Code (IRC) Section 3121(b)(10);
- Non-resident aliens described in IRC Section 410(b)(3)(C); and
- Employees who are eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer.
If any employee who falls under the exclusion for those working less than 20 hours per week or the student exclusion has the right to make elective deferrals, then no employee who falls under such exclusion may be prevented from making elective deferrals.
Unlike a plan that is subject to IRC Section 401(a), a 403(b) plan may not exclude employees based on a generic classification such as:
- Substitute teacher;
- Adjunct professor; or
- Collectively bargained employee.
However, if these employees fall under the “normally work less than 20 hours per week” criterion, then they may be excluded on that basis.
The IRS says a common error occurs when employees working less than full-time are automatically excluded from making elective deferrals to the 403(b) plan. A plan that wants to apply the statutory exclusion for part-time employment must determine eligibility for the 403(b) elective deferrals based on whether the employee is reasonably expected to normally work less than 20 hours per week and has actually never worked more than 1,000 hours in the applicable 12-month period.
The agency recommends that 403(b) plan sponsors review plan language for excluded employees, verify the plan provides an effective opportunity to participate for all non-excludible employees, and review whether the plan may be eligible for transition relief under IRS Notice 2018-95.
Notice 2018-95 provided 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 offered a fresh-start opportunity to comply with the OIAI condition after the relief period ended. This timing can be taken into consideration when determining whether a plan has operated in compliance with the condition for the appropriate period.
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