Not-for-profit employers, including schools, often sponsortax sheltered annuity plans, or “403(b) plans,” rather than 401(k)s. The rules for these plans differ, in waysthat sometimes can trip up employers.
Among the most confounding of 403(b) rules is one requiring universal availability for employees’ elective deferrals. If any employees have the right to defer their compensation into the plan on a pre-tax-basis, then all employees must have that right, including collectively bargained employees.
Certain student workers can be excluded, but only if the plan explicitly says so. Plan documents must be examined, to make sure the exclusion is present.
Rules for excluding part-time employees under 403(b) plans. Part-timers may be excluded from 403(b) plans,but only if they meet all of three separate conditions for ineligibility. If, in any year, an employee does not satisfy any one of the three ineligibility criteria, then the affected employee will be eligible to contribute elective deferrals for the entirety of his or her future employment.
Under this rule, if an employee has ever worked 1,000 Hours of Service during any annual 12-month testing period, then that employee will always be eligible to make deferrals, even if he or she never again works 1,000 Hours. This is the Once-In-Always-In rule – known as “OIAI.”
403(b) plans can condition Employer Contributions on meeting annual service requirements. The Once-In-Always-In rule does not apply to Employer Contributions.
The three criteria for elective deferral ineligibility under 403(b) plans are:
- The employer must have reasonably expected the employee to work fewer than 1,000 Hours of Service during his or her first anniversary year of employment, and
- Following the close of the employee’s first anniversary year of employment:
- for each subsequent testing period (either the Plan Year (as defined in the plan document; usually the fiscal year) or another 12-month “eligibility computation period” specified by the plan), the employee failed to perform 1,000 Hours of Service during the preceding 12-month period, and
- If the employee has ever failed to satisfy both preceding ineligibility criteria with regard to any Plan Year (or another 12-month “eligibility computation period” specified by the plan), then that individual must be considered eligible to make plan deferrals in future, for the entirety of their employment.
- This last criterion is the Once-In-Always-In rule.
- It works so that any part-time employee who satisfies the 1,000 Hour rule during any 12-month testing period will become permanently eligible to make pre-tax, voluntary employee plan deferrals.
- Employer Matching Contributions based on those deferrals can be permissibly subject to annual, minimum service requirements.
Amnesty: IRS grants amnesty to 403(b) plans that failed to satisfy the Once-In-Always-In rules. The IRS has just acknowledged, in Notice 2018-95, that many 403(b) sponsors have failed to enforce the Once-In-Always-In rule for the past 10 years that it has been in effect.
The IRS has announced an amnesty program, concerning only Once-In-Always-In administrative failures. Any such plan error need notbe corrected, andwill not jeopardize the tax qualification and tax advantages of the 403(b) plan, provided that the “OIAI” administrative error applied:
- consistently to all employees, and
- with regard to onlyOIAI errors that affected Plan Years (or other “eligibility computation periods,” as defined in the plan) endingbefore December 31, 2019.
- For 403(b) plans with calendar Plan Years, the amnesty period ends with respect to the Plan Year 2018.
- For 403(b) plans with calendar Plan Years, no amnesty applies to Plan Year 2019.
“Fresh start:” IRS allows employers to exclude employees from making deferrals during testing periods beginning on or after January 1, 2019, in contravention of the OIAI rule. Further, the IRS will allow 403(b) Plan Administrators to disregard employees’ eligible service performed before 2018, in order to permanently exclude them from deferral eligibility, beginning with testing periods that start January 1, 2019, and later.
Employers may use this “fresh start” rule only if the deferral administration of all employees hired before 2018 had been consistent. The “fresh start” rule itself must also be applied consistently to all eligible employees.
The “fresh start” rule may be used if:
- The subject employees:
- were hired before January 1, 2018, and
- had never been granted permanent deferral eligibility under the OIAI rule (even though they were eligible, under the OIAI rule).
- The Plan Administrator may disregard that all such employees:
- were reasonably expected to perform 1,000 Hours of Service during their initial anniversary years, and/or
- actually performed 1,000 or more Hours of Service during any Plan Year (or other 12-month “eligibility computation period”) that began on January 1, 2016, or earlier.
- By disregarding these elements of the employees’ service history, affected employees hired before 2018 can be permanently barred from deferral eligibility, beginning in testing periods starting on or after January 1, 2019, provided that:
- they never perform 1,000 Hours of Service during any Plan Year (or other 12-month “eligibility computation period”) beginning on or after 2017.
- For Plan Administrators who do adopt the “fresh start” procedures, permanent deferral eligibility must be granted, under the OIAI rules:
- to employees hired on or after January 1, 2018, effective January 1, 2019, if they qualify under the OIAI rules, and
- to employees hired before January 1, 2018, effective January 1, 2019, if they fail to qualify under the “fresh-start” rules.
- For example:
- An employee hired before 2018:
- was reasonably expected to work under 1,000 Hours of Service during her initial anniversary year of service, and
- actually worked 1,000 Hours of Service during calendar Plan Year 2017:
- This employee does not qualify for “fresh-start” treatment, as her 1,000 Hours were performed during calendar Plan Year 2017 (a testing period beginning after January 1, 2016).
- The employee’s Plan does qualify under the amnesty program, and so the employee could be denied Plan eligibility from her date of hire through the close of calendar Plan Year 2018.
- But the Plan Administrator would be required to grant the employee permanent deferral eligibility, beginning with calendar Plan Year 2019.
- The effective dates of the amnesty program would then have closed (closed on December 31, 2018).
- And as the employee did not qualify under the “fresh start” program, then, beginning with calendar Plan Year 2019, the OIAI rules would grant the employee permanent deferral eligibility
- based on:
- the employer’s reasonable expectations of her first anniversary year of service, and
- the employee’s actual service performed in 2017.
- based on:
- An employee hired before 2018:
- For example:
- To qualify for the “fresh start” procedure, 403(b) plans must be operated in full compliance with the Once-In-Always-In rule, beginning in testing periods ending on or after December 31, 2019; or the OIAI amnesty program described above.
Required plan amendments in order to take advantage of the IRS amnesty program. Employers that use “volume submitter” or “pre-IRS-approved” plan documents for their 403(b) programs need not make anyplan amendments in order to take advantage of the OIAI amnesty program or the “fresh-start” OIAI rules.
However, employers that use “individually designed” 403(b) plan documents and who wish to take advantage of the amnesty program must properly amend those plans by March 31, 2020, to reflect that the amnesty program was utilized.
No plan amendments are required to either volume submitter or individually-designed plans in order to use the “fresh start” procedures.
Required plan amendments, by March 31, 2020, to reflect the Once-In-Always-In rule. All 403(b) plan documents, including both volume submitter and individually-designed documents, must be amended by March 31, 2020, to reflect the full details of the Once-In-Always-In rule.
IRS Notice 2018-95 seems to imply that volume submitter 403(b) plan documents that the IRS has already pre-approved may lack these essential provisions. All such deficient documents will require amendment and employer adoption to reflect OIAI by the March 2020 deadline.
Employers should check with their plan drafters to ensure these OIAI amendments will be timely available for adoption.
The IRS announcement of 403(b) relief, Notice 2018-95, may be found here: https://www.irs.gov/pub/irs-drop/n-18-95.pdf