- An employer that allows one employee to participate in its 403(b) plan must allow all employees to do so — that is, unless they fall into one of five types of employees who may be excluded. The IRS recently issued a reminder of the importance of following the Universal Availability Rule, and what an employer can do if it runs afoul of it.
The five categories of employees who may be excluded are:
1. non-resident aliens;
2. students performing services described in Internal Revenue Code Section 3121(b)(10);
3. employees eligible to make elective deferrals to the same employer’s 401(k), 457(b) or other 403(b) plan;
4. employees who normally work less than 20 hours per week; and
5. employees who contribute $200 or less annually to the plan.
In addition, Monika Templeman, when she was Director of Employee Plans Examinations at the IRS, said in an IRS webcast on universal availability that the following kinds of employees also can be excluded:
1. work-study students and non-resident aliens with no U.S.-source income; and
2. employees with a normal workweek less than 20 hours, if as of the employee's date of hire, an employer expects them to work less than 1,000 hours in their first 12 months of employment and for each subsequent year, the employee actually does works less than 1,000 hours.
There are ways an employer can limit participation in a 403(b) plan other than specifically excluding employees. For instance, an employer can do so by requiring employees to defer more than $200 each year. An employer cannot do so solely based on job classification, but it can do so by placing certain groups of employees in a 457(b) plan sponsored by the employer, assuming the plan document is written with that exclusion.
Universal Availability Mistakes
Under the universal availability rule, employees must be given an “effective opportunity” to make a deferral. Determining whether employees have this opportunity depends on the facts and circumstances. Generally, plan sponsors meet this requirement if employees have an opportunity to make or change a deferral election at least once a year.
Templeman said that mistakes in following the rule are common, remarking: “In our experience of auditing 403(b) plans, we find a universal availability failure in the majority of plans.”
Templeman explained why compliance with that rule is important: “It’s always prudent to err on the side of caution and inclusion, because a single universal availability failure can jeopardize your entire 403(b) plan. It's very important to keep your 403(b) plan in compliance with the law to preserve the tax deductions for contributions and allow participant accounts to grow tax-deferred.”
And it’s not hard to make a mistake, according to Templeman: “A universal availability failure exists if you excluded an employee from the plan that you should have included in the plan, or if you have an employee in the plan that you should have excluded. It only takes one.”
Fixing Mistakes
It is possible the head off universal availability mistakes before they happen. Templeman suggests self-audits. “Review the reasons you excluded any employees from your plan. If you determine that individuals, or groups of individuals, were improperly excluded, because either you didn't follow your plan document or the document didn't comply with the Internal Revenue Code, you should correct the error as soon as possible,” she advises.
Templeman adds, “The sooner you find and correct a mistake, the more time and money your organization can save. Finding and correcting an error early could allow you to use the IRS Self-Correction Program, which has no IRS involvement, no fees and takes less time to correct than if the mistake continues for years.”
Programs through which an employer may correct a universal availability error include the self-correction program, the voluntary correction program and the audit closing agreement program.
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