IRS Grants Special Relief to 403(b) Plans
By: Dave Reyes
Does your 403(b) plan exclude part-time employees from eligibility to make employee contributions to the plan? If it does, you should be aware of a recent change as to how part-time employees are treated. In general, a 403(b) plan must allow all employees the opportunity to make employee contributions, this concept is known as “universal availability”. However, a plan may elect to exclude from participation part-time employees who normally work fewer than 20 hours per week.
The 20 hour per week rules means that an employee must work at least 1,000 hours in a 12 month plan year to be eligible to make employee contributions. Over the years there has been much confusion about the application of this 20 hour rule. For example, what happens if an employee who is hired to work part-time happens to work more than 1,000 hours in his first year of employment? When must he be allowed to enter the plan? Once he enters, is he in the plan permanently going forward, or only for the years he works more than 1,000 hours? What happens in a year if the employee reverts back to working less than 20 hours per week, is he no longer allowed to contribute? Until now the IRS has provided little guidance in this area, so the interpretation of this rule was left to the plan sponsor.
Fortunately, some of this confusion was cleared up recently when the IRS issued sample language under its new 403(b) pre-approved plan document program. The IRS plan document included language that offered IRS’s interpretation of the 20 hour per week rule, specifically in situations where a participant fluctuated above and below the 1,000 hour threshold. To the surprise of many, the IRS applied what it referred to as the once-in-always-in (OIAI) requirement. What this means is once a participant exceeds the 1,000 hour threshold for a year, he becomes eligible to participate the following year; and not only for the following year, but for all years thereafter. In practice, many plan sponsors did not follow the OIAI requirement. Many non-profits would restrict participation only to years the 1,000 requirement was satisfied. This clarification of the IRS interpretation left many 403(b) sponsors concerned for failure to apply the OIAI rule.
The IRS heard the concerns and in December 2018 issued IRS Notice 2018-95. This notice provides for a relief period to plan sponsors who did not properly apply the OIAI rule. The relief basically allows the sponsor of a 403(b) plan to begin applying the OIAI rule prospectively, beginning after the relief period ends and forego making corrections prior to 2019, if the OIAI was not followed. The notice also allows a plan sponsor the opportunity to modify its plan document to clarify the application of the 20 hour per week rule. Plan sponsors have until April 1, 2020 to amend their plans.
The application of universal availability has always been difficult for plan sponsors of 403(b) plans to understand and apply. In fact, the IRS has stated many times this is the number one error it comes across when it audits 403(b) plans. If your plan has part-time employees who may have been impacted, or if you have questions about the OIAI rule, or universal availability in general, contact Dave Reyes at 216-344-5233 or at firstname.lastname@example.org