Excluding Employees From Mandatory and Employer 403(b) Contributions

“We are a private university that sponsors an ERISA 403(b) plan with a base employer contribution and an employee mandatory contribution. We want to create a new class of employees that is not eligible for the employer contribution and would not be required to make the mandatory contribution. However, our recordkeeper is insistent that we cannot do that due to universal availability rules. Is that correct?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

No, but to be fair to your recordkeeper, there might be some confusion about the difference between excluding employees from the mandatory contribution and elective deferrals, which are entirely separate. Elective deferrals are governed by the universal availability rule, which generally requires (with limited exceptions) that if one employee of a 403(b) plan sponsor is permitted to make elective deferrals, then all employees have the right to make elective deferrals. However, this rule does NOT apply to mandatory contributions. So, you can indeed exclude classes of employees from both mandatory and employer contributions to the 403(b) plan without violating the universal availability rules. However, you generally cannot exclude these employees from the plan entirely; you must generally allow them the right to make elective deferrals.

Also, your exclusion of a group of employees from employer and mandatory contributions is subject to nondiscrimination testing. If the group you are excluding contains a large number of non-highly compensated employees, and your testing was only marginally passing in the first place due to other employee exclusions, it is possible that the exclusion of this group will cause your plan to fail nondiscrimination testing.

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.

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