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 may be excluded from eligibility to make elective deferrals. IRC Section and Treas. Regulation IRC Section 403(b)(12)(A)(ii) Treas. Reg. Section 1.403(b)-5(b) Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources) 403(b) Plan Fix-It Guide Notice 2018-95 Analysis With respect to elective deferrals, a 403(b) plan must meet the requirements of IRC Section 403(b)(12)(A)(ii), also known as the ‘universal availability’ rule. Under this rule, if any employee of the employer maintaining the 403(b) plan may participate, then all of the employer’s employees must be given the opportunity to participate (including the right to designate elective deferrals as designated ROTH contributions). Certain employees may be excluded, including: Employees who normally work less than 20 hours per week* Students performing services described in IRC Section 3121(b)(10)* Non-resident aliens described in IRC Section 410(b)(3)(C) Employees who are eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer *For the less than 20 hours per week exclusion and for the student exclusion, if any employee who falls under one of these exclusions 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: Part-time Temporary Seasonal Substitute Teacher Adjunct Professor 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. An employee normally works less than 20 hours per week only if during the 12-month period beginning on the date employment began (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, if the plan provides, each subsequent 12-month period), the employee works fewer than 1,000 hours of service. Thus, once an employee does not meet the part-time exclusion conditions for any year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion in any subsequent year. However, certain 403(b) plans may be eligible for transition relief from this requirement under Notice 2018-95. Example: John is hired on August 25, 2020, and the 403(b) plan year ends on December 31. Assume it is reasonable to expect that John will normally work a total of 17 hours per week. John works 800 hours in the first 12 months of employment and 850 hours during the plan year ending after the initial year as follows: From 8/25/2020 -------Initial-Yr-of-Emp------8/24/2021 |<------300 hrs------>|<-----500 hrs---->|<-----350 hrs---->| 1/1/2021 ---------850 hrs --------12/31/2021 1st PY ending after Initial Yr-of-Emp If the 403(b) plan provides an exclusion for employees who normally work less than 20 hours per week, John may be excluded for purposes of making elective deferrals under the plan. However, if John works 1,000 hours in any subsequent plan year he will become eligible to make elective deferrals and must be given the opportunity to do so. Once he meets the 1,000 threshold, he can no longer be excluded under the “normally work less than 20 hours per week” criterion, even if his hours drop to less than 1,000 in a subsequent year. A plan may also choose to apply a threshold lower than 20 hours per week. Employees who are eligible to make elective deferrals must be given an “effective opportunity” to participate. Whether the employee has an effective opportunity is determined by all of the facts and circumstances, including notice of eligibility, the period of time an election may be made, and any other conditions on elections. At least once during a plan year the plan must provide an employee (whether part-time or full-time) with an effective opportunity to make or change an elective deferral election, up to the dollar limit in effect, including any catch-up deferrals permitted under the plan, as well as Roth contributions if the plan permits. Universal availability for elective deferrals does not apply to a church, as defined in IRC Section 3121(w)(3)(A), or a qualified church-controlled organization, as defined in IRC Section 3121(w)(3)(B). Issue indicators or audit tips A common error occurs when employees, working less than full-time, are automatically excluded from making elective deferrals under 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. Issue indicator: A 403(b) plan using the statutory exclusions under IRC Section 403(b)(12)(A)(ii). Audit tips: Review plan language for excluded employees. Verify the plan provides an effective opportunity to participate for all non-excludible employees. Review whether the plan may be eligible for transition relief under Notice 2018-95.
