IRS Answers Questions About 403(b) Universal Availability Rules

In a follow-up webinar about 403(b) universal availability rules, Internal Revenue Service (IRS) agents answered questions presented by 403(b) practitioners.

Many practitioners had questions about excluding student employees.

Mary Lou Bailey-Funk, senior internal revenue agent, Office of Employee Plans, first answered the question, “If the plan document provides for anniversary of employment commencement date to determine hours of service, does the plan sponsor shift to the plan year for determining hours of service in subsequent periods?” Bailey-Funk said plan sponsors should continue to use anniversary of employment periods for determining hours in subsequent periods. “Plan sponsors can shift to using the plan year, but that must be specified in the plan document,” she said.

As for student employees, the document needs to state that student employees are excluded, and plan sponsors must operate within the terms of the plan, Bailey Funk said.

If students are allowed to participate in the 403(b), but employees who work less than 20 hours a week are excluded, students scheduled for less than 20 hours per week are not excluded. Bailey-Fund said the regulations on the exclusion of students does not condition that exclusion on hours worked.

However, she noted that if a student works more than 20 hours a week of if a student works in the summer and is not enrolled in classes, he or she may be considered an employee.

If adjunct faculty that normally work less than 20 hours a week are excluded, they would become eligible if they work more than 1,000 hours in 12-month period.

Bailey-Funk also noted that there is a specific definition of "regularly" for regularly scheduled to work less than 20 hours/week. The regulations say an employee normally works fewer than 20 hours a week if and only if within a 12-month period starting with employment and each year thereafter, the employer reasonably expects the employee to work less than 1,000 hours.

So, if an employee was hired as full-time and fails to work full-time, the plan sponsor cannot exclude that employee—the less than 20-hour-a-week exclusion only applies to those not expected to work more than 1,000 hours in a 12-month period. However, if the employee was hired with the expectation they would work less than 1,000 hours in a 12-month period, but they work more hours than that, they can't be excluded.

She said if a plan sponsor inadvertently lets an excluded student in the plan, the plan sponsors can correct using the Employee Plans Compliance Resolution System (EPCRS) by returning the student’s contributions. But, this is only a viable correction if the mistake is insignificant; if the plan sponsor allowed the student to participate more than a year or if it allowed a number of students to participate, it may have to use the voluntary correction program (VCP).

Reese Scripture, senior internal revenue agent, Office of Employee Plans, told webinar attendees 403(b) plans do not provide for entry dates for employees to begin deferring—they participate immediately. If a plan imposes a service requirement it may fail universal availability rules, but plan sponsors are allowed a reasonable amount of time to set up deferrals on their payroll system.

However, 403(b) plan sponsors may apply different eligibility requirements for employer matches or other types of employer contributions, such as a year of service requirement. Scripture also said if an employee must work 1,000 hours to be eligible for employer contributions, the plan sponsor may not contribute employer contributions if the employee works less than 1,000 hours.

In controlled groups, where not all employees are offered a 403(b), plan sponsors may treat each unit as a separate organization if the unit operates on an independent basis. “If in doubt, request a private letter ruling from the IRS,” Scripture said.

A subset of less-than-20-hours-a-week employees cannot be excluded, because 403(b) regulations do not allow classification of employees, except students, non-resident aliens and those covered by another plan of the employer. If any employees who work less than 20 hours a week are allowed to contribute, all must be allowed.

Finally, Scripture addressed the once-in-always-in rule. If an employee changes to student assistant, under the once-in-always-in rule, there is no ongoing requirement for that employee to work 1,000 hours in subsequent years. However, if the plan excludes students, and a student becomes eligible but then returns to student status, that employee can be excluded because once-in-always-in does not apply to students.

If a full-time employee separates from service and is rehired as expected to work less than 20 hours a week, assuming a real severance of employment, they can be excluded, Scripture said. “If there is a less than 12-month separation, that can require a facts-and-circumstances test to determine if the employee can be excluded,” she said.

Scripture recommended that 403(b) plan sponsors keep accurate documentation of employees’ hours worked in a plan year.