A qualified 403(b) plan must satisfy the universal availability requirement with respect to elective deferrals. That means that all employees of the employer must be eligible to make elective deferrals if any employee has the right to do so, with certain exceptions.
While exclusion of employee classes or groups is not allowed, 403(b) plans are able to exclude the following types of employees:
Employees who normally work less than 20 hours per week
Students performing services described in IRC 3121(b)(10)
Non-resident aliens described in IRC 410(b)(3)(10)
Employees who are eligible to make elective deferrals under another qualified plan sponsored by the same employer
For the less than 20 hours per week exclusion and for the student exclusion, if any employee who falls under one of these exclusions has the right to make elective deferrals, then no employee who falls under that exclusion may be prevented from making elective deferrals.
Unlike a plan that is subject to IRC 401(a), a 403(b) plan may not exclude employees based on a generic classification such as:
Collectively bargained employee
How to fix a mistake: To correct any universal availability failures existing in your 403(b) plan, you should provide each improperly excluded eligible employee with the opportunity to participate in the plan in the current and future years. In addition, you may be required to make a contribution to the plan for each eligible employee for the time that the employee was improperly excluded from the 403(b) plan.
The IRS has been active in examining plans that may have employees who are excluded from participation in keeping with historical or industry practices. Common themes would be colleges with adjunct or seasonal professors or coaches; or hospitals with on-call nurses.
We advise 403(b) plan sponsors to duly review classes of employees or individuals who are not being given the opportunity to participate in the plan to make sure the plan is operating in accordance with IRS guidelines for universal availability.
For more information or questions about 403(b) Plans and Plan governance, contact Schneider Downs.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.