A Primer on Universal Availability Rules for 403(b) Plans

There are many similarities between a 401(k) and 403(b) plan. In fact, they are so alike many often assume the main difference is that one is offered by nonprofits and the other is not. Despite this, there are important differences that illustrate the unique challenges 403(b) plan sponsors face. One prominent example is the universal availability rules. Under this requirement, plans must ensure that when one employee participates in the plan that others have the same opportunity. It often requires that management take a proactive approach to communication. It is important that employees are aware of the opportunity to participate and how to do so.  To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is the Universal Availability Rule?

Generally, if one employee is allowed to make a 403(b) contribution, the employer must extend that option to all employees. There are two parts to universal availability: effective opportunity and eligibility.

Effective opportunity means an employee’s ability to participate in the 403(b) plan. Employers must meet annual communication requirements, which can include a group meeting, periodic communications, email, new employee materials, and/or other online posting.

When the employer communicates effective opportunity to employees, it must include a notice of eligibility, the timeframe by which an election can be made, and any other conditions or elections. This communication would let employees know when and by how much they can change their deferral election to the 403(b) plan.

Eligibility relates to which employees are allowed to make salary deferrals to the 403(b) plan. The organization can decide to make all employees eligible, or it can elect to exclude certain groups. 

According to the IRS, the universal availability exclusions can apply to employees who are/will:

• Contribute less than $200 annually to the plan.
• Eligible to participate in another retirement plan at the same employer (can be a 401(k), 457(b), or another 403(b) plan.
• Non-resident aliens.
• Part-time employees who accumulate less than 1,000 per year.*
• Student workers in a work study program.

*Applies to employees who usually work less than 20 hours per week.

Exclusions are optional and some may elect to make all employees eligible to participate. Whatever the determination, it must be made in a written plan provision. It is important to note, universal availability does apply to unionized workers, certain visiting professors, employees who make a one-time election to participate in a 457(b) plan, and employees in a religious order who have taken a vow of poverty. It does not apply to independent contractors nor is it applicable to church or qualified church-controlled organizations.

Updates to Universal Availability Rules

The IRS recently released an updated Listing of Required Modifications (LRMs) for 403(b) plans. Among other updates, universal availability guidance has been modified for part-time employees who generally work less than 20 hours per week. The new LRMs added a definition for Exclusion Year, which is the reference period that employers use to determine excluded employee eligibility for part-time employees.

Employers may designate the exclusion year as either the plan year or the 12-month consecutive period beginning with the employee’s first day of work. When an employer fails to make an election one way or the other, the default exclusion year is the plan year.

Common Mistakes 403(b) Plans Make Regarding Universal Availability

In the past, plan sponsors may have been used to informal recordkeeping or broadly excluding certain types of part-time employees. These and other common mistakes can fall under IRS scrutiny.

Plan sponsors cannot exclude any employee who works less than full-time based on a generic classification, like:

• Part-time
• Seasonal
• Temporary
• Substitute teacher
• Adjunct or visiting professor
• Union employee

Note that if any employee who works less than 20 hours per week is permitted to make salary deferrals to the plan, then every employee must be allowed to contribute as well.

Employers may also fail to keep adequate records for excluded part-time employees. Detailed records of actual hours worked according to the correct exclusion year, noted above, is the easiest way to stay out of trouble. 

It’s also common to fail the communication requirement. Even if the plan broadly includes every employee, it can fail universal availability if plan sponsors don’t completely and accurately communicate eligibility throughout the year.

How to Find and Fix a Universal Availability Mistake

The IRS recommends starting with a list of all W-2 employees and then comparing it to those that did not participate in the plan. Next, determine if an employee who didn’t contribute was:

• Properly notified of his or her eligibility and
• Whether they were incorrectly excluded.

Each employee who may have been improperly excluded or failed to receive adequate communications represents a separate corrective action.

A red flag to look for is if members of a certain group of employees – seasonal employees, as an example – have substantially lower 403(b) participation rates than others. In a school, these groups may include bus drivers, substitute teachers, maintenance workers, and/or cafeteria employees.

Once an error has been identified, there are three methods of correction, including:

• Self-corrective action
• Voluntary correction program (VCP)
• Audit closing agreement program (Audit CAP)

Self-corrective action starts with notifying improperly excluded employees of eligibility and rights. Employers may be required to make contributions to the plan on the employee’s behalf for the time he or she was improperly excluded.

The IRS has more information on how to determine the corrective deferral amount.

Self-corrective action is only available for 403(b) plans that have “sufficient compliance practices and procedures” in place. If a review indicates that practices and procedures aren’t in place or aren’t sufficient according to IRS standards, then the plan would need to be corrected under the VCP. The basic corrective action steps would be the same, except that they would take place under the IRS’s purview – and with additional fees.

Contact Us

Developing a clear understanding of universal availability rules is essential to properly administer an organization’s 403(b) plan. It is essential to make the changes necessary to comply with these regulations. If you have questions about the information outlined above or need assistance with your 403(b)-plan audit, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.