403(b) Plans: Universal Availability Exclusions


Posted by Maria T. Hurd, CPA

ERISA Limited Scope Audits - 401k Audit403(b) plans are known for the universal availability requirement. Everyone is encouraged to make salary deferral contributions, except for a few types of employees who can be excluded, as follows: employees who are participating in an “eligible” 457(b) plan, a 401(k) plan or another 403(b) plan maintained by the employer; non-resident aliens; work-study employees; and employees who normally work less than 20 hours per week.

The word normally often causes confusion and controversy. Many of our 403(b) audit clients ask questions such as:

  • What if a teacher works 25 hours per week but not at all during the summer?
  • Is the determination annual, quarterly, on a school-year basis?

The Treasury regulations under Code Section 403(b) provide that an employee normally works less than 20 hours per week if:

  • The employer reasonably expects the employee to work fewer than 1,000 hours of service for the 12-month period beginning on the date of hire;
  • For each 12-month period ending after the employee’s first anniversary of employment, the employee actually did work fewer than 1,000 hours for the previous year.

In his presentation to the American Institute of Pension Professionals and Actuaries in 2008, Robert Architect from the IRS emphasized that this exclusion rule is designed to be consistent with the 1,000-hour eligibility standard applicable to other ERISA plans.  Here is a copy of Mr. Architect’s entire slide show presentation on the 403(b) final regulations.

For plan sponsors who are still concerned about how to apply indefinite rules that contain words such as normally and reasonably expects, the best advice that we can give is to control what they can measure and keep accurate records of hours worked. Knowing that the look-back period is measured on an annual basis removes all doubt that the determination period is a 12-month plan year. Coaches, substitute teachers, medical residents, etc., who work an irregular schedule can pose a challenge when attempting to capture their hours worked. Implementing a reliable system to measure their hours worked is crucial. Applying indefinite rules requires maintaining definite records.

Photo by Karen Wade (License)