One big difference between 403(b) plans and 401(a) plans is the coverage rules for salary deferral contributions. Unlike 401(k) plans, 403(b)s plans do not have to conduct non-discrimination testing of employee deferrals; instead, 403(b) plans that have a salary deferral feature must permit deferrals for all employees, with a few permissible exclusions. This is known as the “universal availability rule.”
If an employee is not in an excluded category listed in the plan document, they must be permitted to enroll in the plan immediately–no minimum service requirement is permitted for deferrals. Nor may the plan (unlike a 401(k) plan) exclude employees based on classifications such as union, part-time, temporary, seasonal, substitute, or adjunct.
So, who can be excluded from a 403(b) plan? The employer may design the plan document to exclude the following employees:
- Employees eligible to make deferral contributions to another plan sponsored by the employer
- Nonresident aliens
- Students enrolled in the employer (i.e., the employer is an educational institution)
- Employees who normally work fewer than 20 hours per week (let’s call this the “part-time” exclusion).*
*Applying this last exclusion involves some important detail including a continuous look-back requirement. Under the IRS guidance, an employee normally works fewer than 20 hours per week if, for the employee’s first year of employment, the employer reasonably expects them to work fewer than 1,000 hours of service (as defined under section 410(a)(3)(C) of the Internal Revenue Code), and for each Plan Year ending after that first anniversary, the employee has worked fewer than 1,000 hours of service in the preceding 12-month period. This means that at any time during their employment, as soon as that employee achieves 1,000 hours in a year (i.e. their first year or any subsequent plan year), they may no longer be excluded. The only method to measure this status is to keep track of excluded employees’ service continuously. Any formerly excluded part-time employee who becomes eligible (by meeting the 1,000-hour requirement) is then permanently eligible, under the “once in, always in” rule; that is, they cannot be kicked out of the plan for failing to work at least 1,000 hours in a future year.
The IRS requires 403(b) plans to inform eligible employees of the deferral opportunity, and it is common for 403(b) plan documents to contain provisions for universal availability notices to be distributed regularly.
If you sponsor a 403(b) plan, familiarize yourself with the eligibility terms of your plan document to confirm that the plan is being offered to all eligible employees. If your 403(b) is stated on a pre-approved plan document, the universal availability rule is already in the eligibility provisions. Make sure eligible employees are being enrolled promptly.
You should confirm that your document’s excluded employee provisions are being applied correctly in operation. If the employee population includes anyone who has or who is likely to meet the above 1,000-hour criteria for eligibility, make sure the affected employees are notified of their eligibility. Any lapse in compliance with universal availability must be investigated and corrected, in consultation with counsel.
Finally, check with your service provider to see whether they send out a notice periodically to inform/remind eligible employees that they may defer. If not, you should do this yourself at least annually.
For further detail, with examples, of the universal availability rule, following the link below:Issue Snapshot – 403(b) Plan – The Universal Availability Requirement | Internal Revenue Service (irs.gov)