Universal Availability Rules

Posted by Maria T. Hurd, CPA

Universal Availability RulesRetirement readiness is important for everybody” – this is a statement that didn’t make it to the searchable lists of universal truths, but should have. The 403(b) plan regulations realized the benefits of inclusion a long time ago, providing that if any employee can elect to make elective deferrals, then all the plan sponsor’s employees must be given the opportunity to defer, with very limited exceptions. For this universal availability requirement of Internal Revenue Code (IRC) Section 403(b)(12)(A)(ii) to be satisfied, ensuring that employees have an effective opportunity to make elective deferrals at least once a year is imperative. Having a plan and not telling anyone or telling only the “cool kids” is not enough. All employees are the cool kids. They all get the memo.

What are the limited exceptions from the Universal Availability Mandate?

The following excludable employees may be disregarded in applying the universal availability test for salary reduction:

  1. Non-resident aliens with no U.S. source income
  2. Employees who normally work less than 20 hours per week (or a lower number of hours per week as the plan may require)
  3. Students performing certain services (as described in IRC 3121(b)(10)). According to Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44 (U.S. 2011), medical residents aren’t considered to be students under IRC 3121(b)(10)
  4. Employees whose maximum elective deferrals under the plan would be no greater than $200
  5. Employees eligible to participate and make elective deferrals under an eligible governmental 457 plan, a qualified CODA (i.e., an IRC 401(k) plan) or another IRC 403(b) plan of the employer

How the Application of the Universal Availability Rules Goes Astray

It’s Not About What You Do, It’s About How Much You Do It

The less than 20 hours per week exception can’t be based on a job classification (such as part-time employee or adjunct professor) unless the plan defines that job classification using the permitted hour requirement. If an employee becomes eligible to make salary reduction contributions to the plan by working 1,000 hours in a measurement period or because the employee is no longer considered normally working less than 20 hours per week (or a lower number of hours per weeks as defined by the plan), then that employee can no longer be excluded from the plan (i.e., the once-in-always-in rule in 26 CFR 1.403(b)-5(b)(4)(iii)(B)).

    • Employers who used to violate the once-in-always-in requirement by reassessing eligibility to defer annually based on hours worked in a look-back year were granted relief through December 31, 2018. Notice 2018-95 granted a fresh-start opportunity to apply the “once-in-always-in” requirement as if the requirement first became effective January 1, 2018 for a calendar year plan. No plan amendment was required to take advantage of this fresh-start opportunity.

All for One and One for All

If an employer misinterprets the available exclusions and allows some members of an excluded group to participate, then all the employees in that excluded group must be allowed to participate.  For example, if the plan allows certain teachers or any other types of employees who work less than 1,000 hours of service each year to participate, then the plan can’t exclude any employees on the basis of working less than 1,000 hours in a year. (26 CFR 1.403(b)- 5(b)(4)(i)).

Unlike a qualified plan, an IRC 403(b) plan is not generally permitted to have any minimum age and service exclusion for elective deferrals. (26 CFR 1.403(b)-5(b)(4)(ii)(D)).


Presumed Innocent: No Discrimination Testing Necessary

Because of the universal availability rule, the elective deferral contributions in 403(b) plans are not subject to any nondiscrimination or coverage testing, unlike elective deferral contributions in 401(k) plans. Conversely, employer contributions to 403(b) plans are not subject to the universal availability rules, so discrimination testing applies.

Universal coverage can be accomplished through more than one plan. A 403(b) plan is permitted to take into account coverage under another plan to satisfy universal availability through deferral opportunities under another plan. (26 CFR 1.403(b)-5(b)(4)(iii)). If the employer is a government entity, the universal availability requirement applies separately to each governmental entity that is not part of a common payroll. (26 CFR 1.403(b)-5(b)(3)).

Until Proven Guilty, Then There are Consequences

Like any other disqualifying error, the effect of violating the universal availability rules is the loss of IRC 403(b) status. If the errors are not corrected in accordance with the IRS Correction Program, the Employee Plan Compliance Resolution System (EPCRS), contributions to the plan are subject to income tax, employment tax and withholding. Plan disqualification is an unlikely consequence, but the required corrective contributions can be costly.

For Every Error There is a Correction

To execute a correction under EPCRS, the employer must provide improperly excluded employees the opportunity to participate in the plan in current and future years, understand which employees may be excluded from the 403(b) plan, provide proper notification to employees of their eligibility to participate in the 403(b) plan at least annually, and make an employer-funded corrective contribution to the plan that makes up for their missed deferral opportunity.

Acknowledging the fact that an employer-funded corrective contribution is a windfall to participants who received their full paycheck when they were improperly excluded the IRS considers defines the lost opportunity cost as 50% of the amount of the elective salary deferral the employee could have made to the 403(b) plan.

In accordance with the IRS safe harbor in Revenue Procedure 2021-30 Appendix A.05(6), the employer may deem the lost salary deferral amount to be the greater of:

  • 3% of compensation, or
  • the maximum deferral percentage for which the plan sponsor provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee.

Therefore, the corrective contribution is often 1.5% of excluded compensation, adjusted for any lost earnings through the date of correction. A match contribution must be allocated for the full amount of the missed deferral amount, not 50%.

For failures found and fixed promptly, plan sponsors have the option to reduce the corrective contribution for the lost opportunity cost from 50% of the missed deferral to 25%, or to 0% under certain conditions.

See our previous article for the computation of the amount: Correcting Retirement Plan Eligibility Errors

Learning from Past Mistakes and Moving Forward

I have been a plan auditor long enough to see small corrections as well as unexpected, unwelcome, and costly corrections caused by improper exclusion. The lessons learned always result in a plan sponsor that is more mindful of its plan’s provisions. Corrective contributions are not always a small price to pay to regain plan qualification, but they are always a worthwhile pursuit of the forgotten universal truth: Retirement Readiness Is Important for Everybody.

Photo By: Jose Casalderrey