(b)lines Ask the Experts – Eligibility Requirement Restrictions for Dual Status Sponsors

A governmental employer has applied dual status in sponsoring a 403(b) plan and claims exemption from ERISA due to its classification as a governmental entity.  They require employees to complete five years of service in order to be eligible to participate in the employer contribution feature of the plan.  

A reader asks: “Is there any regulation that prohibits this plan from mandating a 5 year service requirement?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:    

No, if the plan is a governmental plan. Section 410(a) does not apply to 403(b) plans, only qualified plans such as 401(a) plans. However, there is a similar section of ERISA (202(a)) that applies to ALL ERISA plans, whether qualified or 403(b). Thus, 403(b) ERISA plans are generally restricted to a one-year waiting period and an age requirement of 21 in order to be eligible for employer contributions, or two years if 100% immediately vested in employer contributions as you describe.   

There is also a more obscure exception that extends the age requirement to age 26, but only for educational institutions where vesting for employer contributions is 100% immediate, though in this case the service requirement cannot be extended to two years.  

But none of these restrictions apply to governmental or non-electing church plans, since they are not subject to ERISA and neither ERISA Section 202(a) nor Code Section 401(a) applies to them. Thus, the five-year waiting period for employer contribution in your example is an acceptable plan provision. You should keep in mind, however, that the universal availability requirement of 403(b) applies to all ELECTIVE deferrals in governmental plans, so eligibility to make an elective deferral is immediate for all employees, with limited exceptions.