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This question pertains to the universal availability rule.

For many years, IRC § 403(b)(12)(A) has permitted the exclusion of students performing services in the employ of a school in which enrolled and regularly attending classes and "employees who normally work less than 20 hours per week."

The 2007 regulations set to take effect 1/1/2009 provide, as part of the universal availability rule, that if the 403b plan allows any employee normally working fewer than 20 hours per week (or such lower number of hours per week as may be set forth in the plan) the opportunity to make 403b elective deferrals, then all employees working that number of hours per week or more must be given the opportunity to make 403b elective deferrals. Similarly, if any such students are permitted to make 403b elective deferrals, then all such students must be permitted to do so. For each of these two categories, such students and <20 hours/week, it's an all or none proposition under the new regs. Treas Reg § 1.403(b)-5(b)(4)(i).

I've been contacted by a public school district that answered the EPCU letter about universal availability that the district excluded substitute teachers and district students that worked in the summer months. None of the substitute teachers or district students worked, or was expected to work, 1,000 or more hours in any year. However, all <20 hours/week employees were not excluded.

The EPCU wrote back giving the district 240 days to correct with 'lost opportunity cost' contributions by the District equal to either the lesser of 1.5% of pay or 1/2 of the NHCE ADP of the district.

My question is whether the 'all or none' interpretation given to the two exclusion categories that is in the 2007 regs for 2009 and later is an interpretation of IRC § 403(b)(12)(A) that the IRS has given in any formal guidance that applies before 2009? If so, then a lost opportunity contribution will be required. If not, then no lost opportunity contribution will need to be made. Your thoughts and comments are appreciated.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 4 weeks later...

My client had me research it exhaustively and there is no clear cut answer. It is a 'gray area' in which I analyzed the various legislative histories, IRS notices, etc. At the end of 10-page opinion letter, I concluded that there was no violation of the universal availability rule prior to 2009, i.e. that the all-or-none approach is not required to the exclusion categories from 1989-2008. The client is sending to the IRS early in the 240 day period a copy of the opinion letter and what the amount of the resulting, very circumscribed (negligible) lost opportunity contribution will be (and for which employees and how determined), so that we can gauge any contrary IRS response and perhaps yet have time during that 240 days to re-evaluate our position.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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We had the same issue come up during a recent IRS audit. The agent cited Notice 89-23 for the all or nothing rule.

We pointed out that the plan document contains a provison with a correction procedure for inclusion of ineligible employees. The correction is to distribute the deferrals that should not have been made. At this point, they have not decided whether they will let us use the plan's correction method. The agent supervising the audit is out until January, so it will likely be February before we hear back from them.

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  • 10 months later...

John,

Did your client get this resolved? I'm curious about how it worked out.

The agent in our client's audit is insisting that the all or nothing rule applied prior to 2009. Notice 89-23 lists it as part of a safe harbor, but also says you can comply using a reasonable good faith interpretation of the code. He told me today I can write up why I think all or nothing doesn't apply and they will consider it. I reminded him I e-mailed it to him several months ago. Apparently, he didn't read it and didn't remember getting it, even though he brought another attachment from the same e-mail to our meeting today. Did I mention how much I love audits?

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Within the 240 days, my client sent the IRS a copy of my opinion letter--without the negligible amount of employees' "lost opportunity". A bit different strategy than what I had suggested in an earlier post in this thread. The 240 days ran out in April. To date, no response from the Service Center which issued the letter about a need for correction and which was sent my opinion letter. We do not have a letter closing their investigation, but we've not heard anything for quite some time.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 2 months later...

Well, we finally got our response from the IRS. They cite code sections 403(b)(1)(D), 403(b)(12)(A), 410(b)(4)(A), sections of the safe harbor provisions in Notice 89-23 and the final 403(b) regulations effective 1/1/2009. Did I mention that the years under review are 2007 and 2008? Their conclusion is that since ONE individual who worked less than 20 hours per week was allowed to participate, the plan fails to satisfy the nondiscrimination requirements of 403(b)(12)(A)(ii), so the entire plan is disqualified.

I guess I should be glad they gave us plenty of time to select an attorney.

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  • 5 months later...

Was your client required to make a corrective contriubtion? I'm trying to decipher if it is irrefutable that the sole means of correcting this type of failure (i.e., document excludes ee's woith <20 hours per week, while operationnally a couple are allowed to defer) is to make a contribution. I like the idea of imposing the documents provisions regarding correcting inclusion of ineligible employees.

Any sites, etc. would be very helpful...

Austin Powers, CPA, QPA, ERPA

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We are still waiting for an IRS response to our attorney's letter. It's been four months. The audit started in the Fall of 2008.

Our proposed correction is to retroactively amend the plan to make that one NHCE eligible to defer. The reasonable good faith interpretation option listed in Notice 89-23 requires that the opportunity to defer be available on a basis that does not discriminate in favor of HCE's.

Announcement 95-33 has a discussion on the reasonable good faith standard and says that nondiscrimination issues should be pursued only in cases involving clear, egregious violations. It gives examples of egregious violations.

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