“Would not the “phasing out” of a catch up election, where existing users are permitted to exhaust the catch-up but new elections would be prohibited, violate universal availability?” 

Michael A. Webb, vice president, Cammack Retirement Group, and David W. Powell, Groom Law Group, answer:

This is an excellent, excellent question, and the Experts had to do a bit of digging to unravel this mystery! The reason for this is that the relevant regulation—namely, Section 1.403(b)-5(b)—is a tad unclear:

Section 1.403(b)-5(b)

(1)  General Rule. Under section 403(b)(12)(A)(ii), all employees of the eligible employer must be permitted to have section 403(b) elective deferrals contributed on their behalf if any employee of the eligible employer may elect to have the organization make section 403(b) elective deferrals. Further, the employee’s right to make elective deferrals also includes the right to designate section 403(b) elective deferrals as designated Roth contributions.    

(2) Effective opportunity required. For purposes of paragraph (b)(1) of this section, an employee is not treated as being permitted to have section 403(b) elective deferrals contributed on the employee’s behalf unless the employee is provided an effective opportunity that satisfies the requirements of this paragraph (b)(2). Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections. A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election (as defined at §1.401(k)-1(a)(3)) between cash or a contribution to the plan. Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)-4(c) (including any permissible catch-up elective deferrals under §1.403(b)-4(c)(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees. 

In the final sentence, The reference to “4(c)(3)” includes the 15 year catch-up, while “4(c)(2)” is the age 50 catch-up. Thus it appears that this section is stating that a plan cannot prohibit the use of either catch-up (15-year or age-50) without violating universal availability. However, we know from other IRS guidance that the 15-year catch-up election and age-50 catch-up election are not required plan provisions.

Furthermore, the language here does not reflect a requirement, as the word “includes” rather than the phrase “must include” is used; contrast this to paragraph (1) of this subsection, where the phrase “must be permitted” is used. Add this to the fact that the entire paragraph (2) is a “facts and circumstances determination” and the final 403(b) regulations, which typically are an excellent source for resolving any 403(b) compliance question, only appear to deepen the mystery in this case.

With your question still unanswered, the Experts turned to the 403(b) Section of the Internal Review Manual, or IRM, a set of examination (i.e., audit) guidelines which is another excellent source of information, for assistance.  Section 4.72.13.14.1 of that manual (yes, that is a lot of numbers!) contains the following information:

(9) Additional catch-up contributions under IRC 414(v) or 402(g)(7) [the 15 year catch-up] must also be universally available to employees if these are made available to any employee. See Treas. Reg. 1.403(b)-5(b)(2). 

Thus, the 15-year catch-up election is not required to be offered to all employees to satisfy universal availability, but if it is offered to one employee, it must be offered to all. Thus, it would appear that, if the election is to be eliminated, it must be eliminated for all employees; existing users of the election cannot be permitted to exhaust the election without violating universal availability as you suggested.

However it should be pointed out that IRM does not carry the full weight of regulation. But it does provide valuable insight into the thought process of the IRS in the event of an audit. Thus, any entity that wishes to “phase out” the 15-year catch-up election, rather than eliminate it for all employees or retain it for all employees, should contact benefits counsel well versed in such matters regarding this IRM language.

The Experts greatly appreciate the question and clarification!