(b)lines Ask the Experts – Relief for Excluding Employees From 403(b) Plans

“I read that the IRS provided some relief to plan sponsors who erroneously excluded part-timers from the right to make elective deferrals to their 403(b) plans. Was there other relief offered for plan sponsors who may have excluded employees other than part-timers from the right to make elective deferrals?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

No, there was no other relief offered at this time. The recently released guidance from the IRS, Notice 2018-95, actually provides relief that is quite narrow in scope, applying only to only certain plan sponsors and certain part-time employee exclusions. Generally, part-time employees may be excluded from making elective deferrals: (1) during their first year of employment if the employer reasonably expects the employee to work fewer than 1,000 hours during that year, and (2) for any later year if the employee did not actually work at least 1,000 hours in the preceding 12-month period. Specifically, the relief applies only to plan sponsors who were erroneously administering their 403(b) plans to exclude employees who normally work less than 20 hours per week by not accounting for what is called the “Once in Always In (OIAI)” provision, which states that, once a part-time employee satisfies the hours-worked requirement to make elective deferrals, he/she must be eligible to make elective deferrals in future years EVEN IF he/she fails to satisfy the hours-worked requirement for those years. Apparently, a number of plan sponsors failed to follow this rule, and instead looked at each year in a vacuum, without taking into account an employee’s prior eligibility to make elective deferrals to the 403(b) plan, which was not correct. 

Sound confusing? It is, which is why we mentioned in a previous Ask the Experts column that, as a practical matter, many plan sponsors choose to allow all employees the right to make elective deferrals upon date of hire, even though certain part-timers and other limited classes of employees can be excluded under the final 403(b) regulations. This Notice provides some insight as to just how easy it is to run afoul of these complicated rules if a plan sponsor attempts to exclude certain employees from the right to make elective deferrals.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.