As we have written about in prior editions of EBS News (Summer 2016), 403(b) plans are challenged to track and account for part-time employees. 403(b) plans are generally required to cover all employees under their salary deferral plans (with specific exceptions), otherwise known as “universal availability.” One of the exceptions allows plans to exclude employees “who normally work less than 20 hours a week.”
The 2009 403(b) regulations changed the exclusion standard from 20 hours a week to 1000 hours a year, measured during the employee’s first 12 months of employment and in subsequent rolling 12-month periods following the initial period. To apply the exclusion, plan sponsors must account for the hours during each period to determine if an employee exceeded the 1000-hour threshold.
Some plan sponsors applied this rule on a year-by-year basis. Employees who exceeded the threshold in a year, but fell below it the next year were only allowed to participate in the plan for the year following the year of 1000 hours of service. In a year following less than the required number of hours, the employee was excluded from participation. Other sponsors chose to apply the rule to such employees by continuing their participation for all years once the 1000-hour mark was reached, regardless of subsequent service.
The IRS, in Notice 2018-95, has confirmed the latter approach, called the “once-in always-in rule.” Beginning in 2019, all 403(b) plan sponsors must operate under this rule, and change their administrative practices to consider anyone who works more than 1000 hours in any 12-month eligibility period as permanently eligible for deferrals under their plan.
For plans that operated in good faith under the “in and out” rule, there is relief available. Plans will be granted a fresh start beginning with the 2019 year. Years from 2009 through 2018 fall into the “remedial amendment period” that runs through the required plan restatement date of March 31, 2020. Plans use of the in-and-out rule will not be considered an operational failure. To maintain compliance, these plans need to document their actual operation for their affected years in their adoption of a pre-approved document as part of the plan restatement process, and do not need to adopt an interim amendment.
For any questions regarding the plan restatement process or the application of the eligibility rules, please contact Richard Green at rgreen@windes.com or Therese Cheevers at tcheevers@windes.com, or by phone (844) 252-7337.