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TIAA-CREF Document from Ascensus


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Has anyone else noticed that TIAA-CREF's document does not include the "20 hours per week" exclusion? Is there any scoop as to why it's not there, and whether or not there are thousands of sponsors who THINK that this group is excludable when in their plan document they are really not?

Austin Powers, CPA, QPA, ERPA

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It's probably due to the rule in the final regs where if you allow one person who could be excluded under the <20 hours per week exclusion to defer, then you are not allowed to use that exclusion. One mistake and you have improperly excluded everyone who was previously not eligible because they were < 20 hours per week. If the 403(b) is subject to ERISA, you could have someone that ERISA forces you to allow to participate who would be excluded under the < 20 hours per week rule. Except for a church plan, it doesn't seem worth the risk to use the <20 hrs per week exclusion.

We have a client's 403(b) under audit where had the <20 hour exclusion and had a single person who was full time for several years, then reduced hours to <20 per week. The person wanted to keep deferring and HR said OK. The IRS agent is saying this violated the universal availability requirement and disqualifies the entire plan. He's auditing 2006-2007 and insists the all or nothing rule applied then, but that's another story.

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Has anyone else noticed that TIAA-CREF's document does not include the "20 hours per week" exclusion? Is there any scoop as to why it's not there, and whether or not there are thousands of sponsors who THINK that this group is excludable when in their plan document they are really not?

Why would any employer want to include a rule excluding employees who "normally work less than 20 hours a week" because it requires tracking the hours of employees and the penalty for failure to comply is disqualficiation. Also the definition of "normally works less than 20 hours week" is extremeny vague and is subject to interpretaton by the IRS. I would never recommend that a 403b plan adopt such a rule because of the consequence of inadvertent noncomplaince. Just allow all employees (other than students) to participate.

mjb

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Why would any employer want to include a rule excluding employees who "normally work less than 20 hours a week" because it requires tracking the hours of employees and the penalty for failure to comply is disqualficiation

To save $10,000 a year in audit fees, for one!

Austin Powers, CPA, QPA, ERPA

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There is another kind of plan available to non-profits that allows requiring up to age 21 and a year of service, with semi-annual entry, for deferral eligibility. And, it isn't subject to "the most insane rule I ever heard in my life". And yes, I agree that rule is insane. Just because they are eligible for a 403(b) doesn't automatically mean that is the best plan for them. Sometimes a 401(k) makes more sense.

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Why would any employer want to include a rule excluding employees who "normally work less than 20 hours a week" because it requires tracking the hours of employees and the penalty for failure to comply is disqualficiation

To save $10,000 a year in audit fees, for one!

Austin:

I am confused by your response. My understanding is that "model" plans issued by the IRS and some financial providers were only intended to apply to non ERISA plans, e.g., SD plans or NP 403b plans that only permit voluntary employee contributions, not for plans subject to ERISA for which the eligibility rules are different. I believe that Bob Architect noted in the 403b FAQ that the IRS less than 20 hour week rule would permit exclusion of part timers who normally work less thn 20 hours a week even though they may work more than 20 hours week during seasonal periods such as Christmas while a plan subject to ERISA is requried to use the more stringent 1000 rule which would result in inclusion of any participant who actually works 1000 hours in a plan year regardless of their normal work schedule. Therefore a plan subject to ERISA could never adopt the less than 20 your a week rule even if available under the document and must adopt the more stringent 1000 hour rule as well as the audit requirement for some plans.

My recollection is that the IRS model 403b plan does not include an excluson for less than 20 hour week employees but I have not checked it.

mjb

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My understanding is that the exclusion is still available ot ERISA Plans, HOWEVER, if an employee every breaks the 1,000 hour threshhold (in either their first 12 months or any subsequent plan year), then they can NEVER be excluded. A Non-ERISA Plan, soemone who drops below 20 hours could subsequently be considered ineligible.

But of course, if your client operates an organization with a lot of people working 10 hours a week who will never hit 1,000 hours, then the 20 hour a week exclusion can still be quite valuable. My reading of TIAA-CREF's document is that this is not an option. Does everyone agree with that?

As for switching over to 401(k), I agree that is an option, and perhaps if I was advising on a new plan I would steer them towards 401k. But they already have a 403b, and starting a 401k is a good sized project. A very good sized project.

Austin Powers, CPA, QPA, ERPA

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My understanding is that the exclusion is still available ot ERISA Plans, HOWEVER, if an employee every breaks the 1,000 hour threshhold (in either their first 12 months or any subsequent plan year), then they can NEVER be excluded. A Non-ERISA Plan, soemone who drops below 20 hours could subsequently be considered ineligible.

But of course, if your client operates an organization with a lot of people working 10 hours a week who will never hit 1,000 hours, then the 20 hour a week exclusion can still be quite valuable. My reading of TIAA-CREF's document is that this is not an option. Does everyone agree with that?

As for switching over to 401(k), I agree that is an option, and perhaps if I was advising on a new plan I would steer them towards 401k. But they already have a 403b, and starting a 401k is a good sized project. A very good sized project.

I dont understand your analysis. While in a non ERISA plan an employee who drops below 20 hour a week can be excluded from participation in a future year under IRS rules, it is irrevalent for plans subject to ERISA because the employee would have to be included in future years for eligibility and would count for the purposes of the audit requirement which you said was the only reason to apply the IRS 20 hour a week rule. I still dont see the significance in plan administration for using the IRS 20 hour a week rule in an ERISA 403b plan.

It seem to me that adopting the ERISA requirement of including all employees who work more 1000 in a year will cover the situation of a part timer who is normally works less than 20 your a week but actually works more than 20 hours a week during part of the year. And it automatically excludes a person scheduled to work less than 20 hours a week who in fact never works 1000 hours in a plan year which is permitted under the IRS rule.

The other problem with your complex construction for eligibility is that HR personnel will apply it incorrectly with disasterous regulatory consequences for the sponsor under the IRS or DOL rules.

mjb

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Example- ERISA Plan excludes people who normally work less than 20 hours a week:

Johnny (and 30 people just like him) work 10 hours a week every week forever. These people are NOT eligible for the Plan because a) they fit into the 20 hour a week exclusion, and b) they have never worked 1,000 hours in a 12 month period. So I've avoided having to count 30 people in the audit, giving 30 people enrollment materials, giving 30 people the SAR, etc.

Steve, on the other hand, worked 10 hours a week for years, and then was hired full-time. He therefore met the statutory eligiblity and is in the Plan forever now, even if he drops below. So out of the 31 part-timers, we are able to exclude 30 using the 20 hours per week exclusion. Not bad...

Example - TIAA-CREF's Document

Same facts and circumstances, and now all 31 people in the prior example are all participants in the Plan.

I totally agree that the consequences of misapplying this could be disastrous, but there are very compelling reasons to use this exclusion (again, the $10,000 audit fee being the biggest). But I admit I am just beginnign to comprehened these complexities, so if there is something I am missing, please do tell me...

Austin Powers, CPA, QPA, ERPA

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Example- ERISA Plan excludes people who normally work less than 20 hours a week:

Johnny (and 30 people just like him) work 10 hours a week every week forever. These people are NOT eligible for the Plan because a) they fit into the 20 hour a week exclusion, and b) they have never worked 1,000 hours in a 12 month period. So I've avoided having to count 30 people in the audit, giving 30 people enrollment materials, giving 30 people the SAR, etc.

Steve, on the other hand, worked 10 hours a week for years, and then was hired full-time. He therefore met the statutory eligiblity and is in the Plan forever now, even if he drops below. So out of the 31 part-timers, we are able to exclude 30 using the 20 hours per week exclusion. Not bad...

Example - TIAA-CREF's Document

Same facts and circumstances, and now all 31 people in the prior example are all participants in the Plan.

I totally agree that the consequences of misapplying this could be disastrous, but there are very compelling reasons to use this exclusion (again, the $10,000 audit fee being the biggest). But I admit I am just beginnign to comprehened these complexities, so if there is something I am missing, please do tell me...

Austin:

You are proving my thesis that employers who are subject to ERISA should not use model 403b plans designed to comply with the IRS regs because thees documents ignore the special consequences under ERISA that result from adoption of simplified eligibiltiy provisions , e.g., plan audit, because of an increase in the number of participants in the plan (where an audit is not a requireed for 403b plans exempt from ERISA).

As you are well aware model, prototype or standarized documents frequently contain provisions that are not required under the law but which the drafter believes could have a beneficial effect. For example, some prototype 401k plan documents funded solely with mutual funds include a provision requring spousal consent to a lump sum distribution or a loan (or contain complicated langauge in order for the plan to opt out of the spousal consent requirement). The rationale for adding such requirement is to prevent the plan from inadvertently violating the spousal consent requirement if an annuity option is added later and a participant elects it as the normal benefit option. Same with requiring inclusion of all employees who work less than 20 hours a week prevent inadvertent violation of the IRS regs if an employee who normally works less than 20 hours a week works more than 20 hours week.

mjb

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You are proving my thesis that employers who are subject to ERISA should not use model 403b plans designed to comply with the IRS regs because thees documents ignore the special consequences under ERISA that result from adoption of simplified eligibiltiy provisions , e.g., plan audit, because of an increase in the number of participants in the plan (where an audit is not a requireed for 403b plans exempt from ERISA).

The Corbel document that I am using does not ignore it. It says you can exclude people who normally work less than 20 hours; HOWEVER, if that person ever goes over 1,000 hours in a 12 month period, then they will always be eligible (and thereofre satisfies ERISA).

Let's assume a client would never make a mistake - wouldn't you agree that this language reduces the participant count by 30 people in my example, as opposed to a plan that does not allow the 20 hour a week exclusion?

But on an unrelated note, I think TIAA made a grave error not including this option, since many of their clients are operationally excluding them, not realizing that their document does not include this option. At least that's what I'm hearing from many different CPA auditors...

Austin Powers, CPA, QPA, ERPA

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You are proving my thesis that employers who are subject to ERISA should not use model 403b plans designed to comply with the IRS regs because thees documents ignore the special consequences under ERISA that result from adoption of simplified eligibiltiy provisions , e.g., plan audit, because of an increase in the number of participants in the plan (where an audit is not a requireed for 403b plans exempt from ERISA).

The Corbel document that I am using does not ignore it. It says you can exclude people who normally work less than 20 hours; HOWEVER, if that person ever goes over 1,000 hours in a 12 month period, then they will always be eligible (and thereofre satisfies ERISA).

Let's assume a client would never make a mistake - wouldn't you agree that this language reduces the participant count by 30 people in my example, as opposed to a plan that does not allow the 20 hour a week exclusion?

But on an unrelated note, I think TIAA made a grave error not including this option, since many of their clients are operationally excluding them, not realizing that their document does not include this option. At least that's what I'm hearing from many different CPA auditors...

Austin:

I dont think its TIAA's mistake that plan administrators or their advisors dont read the terms of the plan document that are adopted. It happens all the time. The auditors should be informing the clients that they are not following the terms of the plan. I dont know who the model T/C plan was intended to be used by. It may never have intended to be used by a ERISA 403b plan. I believe there is an 800 number that you can call to discuss this question with T/C. Just google the T/C website and search for model 403b plan.

What you are proposing is language that has been around for 20 years when sponsors found out that they could not exclude part time employees once they worked more than 1000 hours in plan year. I believe there was some IRS notice that informed plan sponsors of this requirement and plans were revised to state that part time employees would be included to meet the participation requirements of 410(a) once they worked 1000 hours. If a client has an ERISA 403b plan the client should read the plan doucment to understand what is required.

mjb

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The document I'm using is definitely an ERISA Plan, as is the TIAA CREF document I'm referrring to.

But you seemed to suggest in an earlier statement that the 20 hour a week exlcusion should not be used in an ERISA Plan. Am I stating your thoughts correctly? I believe that it is still an effective way to limit participant counts. Are you suggesting that a plan with 125 active employees, including 30 people working 10 hours a week, should NOT use the 20 hour a week exclusion to remain below the audit threshhold?

Austin Powers, CPA, QPA, ERPA

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I must be missing something.

Is it not true that the 30 some people working 10 hours a week will never become eligible to participate, because they won't get 1000 hours in a year? So they aren't countable as participants because of the 1000 hours requirement, with or without a <20 hours exclusion.

And even with the <20 hours exclusion, if someone gets some extra hours and ends up with 1000 hours, that person becomes a participant forever, even if they go back to a schedule of <20 hours.

So what am I missing here?

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Is it not true that the 30 some people working 10 hours a week will never become eligible to participate, because they won't get 1000 hours in a year? So they aren't countable as participants because of the 1000 hours requirement, with or without a <20 hours exclusion.

Without the 20 hour a week exclusion they are eligible for deferrals immediately because the only way to avoid immediate eligiblity for part-timers is the 20 hour a week exclusion. You can't have an eligiblity in a 403b that says "1,000 hours in 1st 12 months." At least not for deferrals.

Austin Powers, CPA, QPA, ERPA

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  • 1 year later...

Austin,

This has just happened to us! I am a new Director of Finance with a NPO and our new auditors have just informed us that we were required to have 403(b) audits for 2009, 2010 and this year 2011 because our TIAA-CREF Ascensus plan docs did not exclude the PT employees. The inclusion of these PT'rs put us over the 100 mark. Plus, we have 2 plans, so we're looking at 6 audits!! And amending the 5500s. What a boon for these auditors.

So just curious if you figured anyway around this. Amending the plan docs asap of course going forward, but is there any relief or exception that can be made for the older years? And, since we have all of the PT'rs that did not contribute, we have to include them in the ACP test (that was never done here either), which will drag our average down and we'll probably fail all of these too.

What a mess.

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Did your old document include the 20 hour a week exclusion? Perhaps you could argue that it was always your intention to have the exclusion, that's the way it was always communicated to the employees, etc. Some attorney might conclude that it was a scrivener's error and do a retroactive amendment. I've seen others "work around the issue." If someone could conclude that you sure could save yourself a lot of dough - money which could be spent on whatevver good works your organization does...

But let's say you can't work around it:

1) These people should not affect your ACP test because you generally exclude people who never worked 1,000 hours a year from the ACP Test.

2) Your bigger problem is the fact that you told these people they could not deefer, when in fact they could defer. For that you're supposed to contribute 50% of the average contributions of all the employees, plus 100% of the match.

P.S. Merge the plans before 12/31 (assuming calendar year)!!

Austin Powers, CPA, QPA, ERPA

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  • 1 month later...

Isn't this a complete catch-22 for ERISA plans? Let's say you use the 20 hour exclusion and then a year or so down the road someone manages to get more than 1,000 hours in a plan year. You let them defer at the beginning of the next year. Everything seems fine under the 403(b) regs and ERISA. Then, the year that you let them in they are under 1,000 hours again. The next year it appears they have to come out for 403(b) purposes because it seems like this is a test based on each plan year....

(2) For each plan year ending after the close of the 12-month period beginning

on the date the employee’s employment commenced (or, if the plan so provides, each

subsequent 12-month period), the employee worked fewer than 1,000 hours of service

in the preceding 12-month period. (See, however, section 202(a)(1) of the Employee

Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and

regulations under section 410(a) of the Internal Revenue Code applicable with respect

to plans that are subject to Title I of ERISA

But, they need to stay in for ERISA purposes. But, if you let them in because of ERISA then you can't apply your 20 hour exlcusion for anyone under Sec. 1.403(b)-5(b)(4).

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