Excluding Employees From the Right to Make 403(b) Elective Deferrals

“I work with a charter school that wishes to exclude certain employees from the right to make elective deferrals to its 403(b) plan. Specifically, the school wishes to exclude employees who would work less than 10 hours per week and employees who would defer less than $10 per month. Can they exclude such employees from the right to make elective deferrals in this manner without violating the universal availability rules?”

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:

Possibly. The universal availability rules indeed apply to charter schools (the only exception to such rules is for churches and qualified church controlled organizations (QCCOs)). Those rules generally permit all employees the right to make elective deferrals to a 403(b) plan, with the following limited exceptions:

• Employees who will contribute $200 or less annually;
• Employees who participate in a 401(k) or 457(b) plan, or in another 403(b) plan;
• Nonresident aliens with no U.S. source income;
• Employees who normally work less than 20 hours per week (or such lower number of hours per week as may be set forth in the plan—hours MUST be tracked in order to administer this exclusion); and
• Students performing services described in Code Section 3121(b)(10) (generally, those enrolled in a post-secondary educational institution performing services for that institution).

If the charter school in question wishes to exclude such employees, the restrictions they are currently using could fall into the categories of “Employees who normally work less than 20 hours a week (or such lower number of hours per week as may be set forth in the plan)” (the 10-hour per week exclusion they are using, assuming the other conditions of this universal availability provision are satisfied), and “Employees who will contribute $200 or less annually” (the $10 per month exclusion, provided that the school modify this exclusion to state $200 per year, not $10 per month).

As we have pointed out in at least one prior Ask the Experts column, just because an employer CAN use such universal availability exclusions, doesn’t mean that they SHOULD, since such exclusions can be difficult to administer in practice.

And, of course, Employee Retirement Income Security Act (ERISA) counsel with specific expertise in this area should be consulted before excluding any type of employee from the right to make elective deferrals to a 403(b) plan.

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.