On August 11, 2021, the IRS released an Issue Snapshot focusing upon the universal availability requirement applicable to 403(b) plans (excluding church plans). The analysis was designed to address a common error with respect to the exclusion of certain employees from plan participation.
Under the universal availability rule, all employees of the 403(b) plan sponsor must be eligible to make elective deferrals if any employee has the right to do so. There are limited exceptions to this rule, including one for certain part-time employees. However, part-time employees cannot be excluded as a general class, such as part-time, temporary or seasonal employees. Rather, such employees can only be excluded if they “normally work less than 20 hours per week.”
An employee is considered to normally work less than 20 hours per week if, during the 12-month period beginning on the employee’s hire date (the initial year), the employer reasonably expects the employee to work fewer than 1,000 hours, and for each plan year ending after the close of the initial year (or subsequent 12-month period), the employee actually works fewer than 1,000 hours. If an employee does not satisfy these requirements for any year (for example, by working more than 1,000 hours), the employee can no longer be excluded from making elective deferrals under the part-time exclusion in any future year (regardless of how few hours the employee works in such future year).
The Issue Snapshot also emphasizes that eligible employees must be given an effective opportunity to participate in the plan, which includes notice of eligibility and the period and conditions for elections. At least once during the plan year, the employee must be able to make or change deferral elections, including, as applicable, catch-up or Roth contributions, up to the dollar limits in effect.
Although the Issue Snapshot is not an official announcement of the law that can be cited as precedent, employers who sponsor 403(b) plans may find this internal analysis helpful. Employers may want to review their plan documents and operations to ensure that any exclusion of part-time employees is in accordance with this guidance. In the event of past exclusion failures, employers should consult counsel regarding possible transition relief under IRS Notice 2018-95.
Issue Snapshot – 403(b) Plan – The Universal Availability Requirement »
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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