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403b Eligiblity Period?


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Can a 403(b) have a short eligibiltiy period or not? I have an ERISA Attorney drafted 403b with a 90 day wait. I can't find anything in this reg that is specifically failed. The term "permitted" as used in the first paragraph is defined in the second. In there it references all relevant facts and circumstnces including "the period of time during which an election may be made." What's more, nowhere in here does it specifically say "eligiblity must be effective on date of hire." My orignal thought was that most employers/"prototypes" use immediate eligiblity as a de facto safe harbor, but that a short eligiblity period might not be per se a problem. Thoughts?

(b) Universal availability required for section 403(b) elective deferrals—(1) General rule. Under section 403(b)(12)(A)(ii), all employees of the eligible employer must be "permitted" [term "permitted" defined in next paragraph] to have section 403(b) elective deferrals contributed on their behalf if any employee of the eligible employer may elect to have the organization make section 403(b) elective deferrals. Further, the employee's right to make elective deferrals also includes the right to designate section 403(b) elective deferrals as designated Roth contributions.

(2) Effective opportunity required. For purposes of paragraph (b)(1) of this section, an employee is not treated as being permitted to have section 403(b) elective deferrals contributed on the employee's behalf unless the employee is provided an effective opportunity that satisfies the requirements of this paragraph (b)(2). Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections. A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election (as defined at §1.401(k)–1(a)(3)) between cash or a contribution to the plan. Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)–4© (including any permissible catch-up elective deferrals under §1.403(b)–4©(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees. An effective opportunity is not considered to exist if there are any other rights or benefits (other than rights or benefits listed in §1.401(k)–1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or indirectly) upon a participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract.

Austin Powers, CPA, QPA, ERPA

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Universal means universal. Assuming the plan is subject to the universal availability rules (i.e., it's not a church plan), the only exclusions allowed are those at 1.403(b)-5(b)(4). Here is that provision:

"(4) Exclusions--(i) Exclusions for special types of employees. A plan does not fail to satisfy the universal availability requirement of this paragraph (b) merely because it excludes one or more of the types of employees listed in paragraph (b)(4)(ii) of this 90 section. However, the exclusion of any employee listed in paragraph (b)(4)(ii)(D) or (E) of this section is subject to the conditions applicable under section 410(b)(4). Thus, if any employee listed in paragraph (b)(4)(ii)(D) of this section has the right to have section 403(b) elective deferrals made on his or her behalf, then no employee listed in that paragraph (b)(4)(ii)(D) of this section may be excluded under this paragraph (b)(4) and, if any employee listed in paragraph (b)(4)(ii)(E) of this section has the right to have section 403(b) elective deferrals made on his or her behalf, then no employee listed in that paragraph (b)(4)(ii)(E) of this section may be excluded under this paragraph (b)(4).

(ii) List of special types of excludible employees. The following types of employees are listed in this paragraph (b)(4)(ii):

(A) Employees who are eligible under another section 403(b) plan, or a section 457(b) eligible governmental plan, of the employer which permits an amount to be contributed or deferred at the election of the employee.

(B) Employees who are eligible to make a cash or deferred election (as defined at §1.401(k)-1(a)(3)) under a section 401(k) plan of the employer.

© Employees who are non-resident aliens described in section 410(b)(3)©.

(D) Subject to the conditions applicable under section 410(b)(4) (including section 410(b)(4)(B) permitting separate testing for employees not meeting minimum age and service requirements), employees who are students performing services described in section 3121(b)(10).

(E) Subject to the conditions applicable under section 410(b)(4), employees who normally work fewer than 20 hours per week (or such lower number of hours per week as may be set forth in the plan).

91 (iii) Special rules. (A) A section 403(b) plan is permitted to take into account coverage under another plan, as permitted in paragraphs (b)(4)(ii)(A) and (B) of this section, only if the rights to make elective deferrals with respect to that coverage would satisfy paragraphs (b)(2) and (4)(i) of this section if that coverage were provided under the section 403(b) plan.

(B) For purposes of paragraph (b)(4)(ii)(E) of this section, an employee normally works fewer than 20 hours per week if and only if-- (1) For the 12-month period beginning on the date the employee’s employment commenced, the employer reasonably expects the employee to work fewer than 1,000 hours of service (as defined in section 410(a)(3)©) in such period; and (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.)"

Full stop.

Tom Geer

Thomas L. Geer, J.D., LL.M.

Benefit Plan Solutions

Blog: http://401k-403b-457-plansblog.blogspot.com/

Email: geertom@gmail.com

Phone & Fax: (888) 315-6720

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I disagree, because I believe the way retirement plan law is structured, eligibility requirements that deal with required service periods are addressed independently of exclusions. So in my example, people with less than 90 days of service would not be considered "excluded" from the plan. That;s why most plans (including 403b's) document "exclusions" (such as union employees, nonresident aliens, etc.) in a totally different section of the Plan from eligiblity.

Plus, I think my citation is more on point, since it is the universal availability requirement that we are discussing. And if what they meant to say was "everyone must be eligible from the date of their first pay-check" then, by golly, I think they would have said that, but they didn't.

You may be right (in fact, you probably are), but I'm just not convinced I've got the full answer yet.

Austin Powers, CPA, QPA, ERPA

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Austin,

Part of your quoted section says:

Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)–4© (including any permissible catch-up elective deferrals under §1.403(b)–4©(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees.

With a 90 day waiting period in a calendar year 403(b), how does someone hired full time on 10/1/2010 have an effective opportunity to defer for 2010? They are an employee, so they have to be considered in determining if universal availability is satisfied. They are not allowed to defer until 1/1/2011, so there is no right to contribute deferrals up to the limit for 2010. That means there is no effective opportunity in 2010 and the plan does not satisfy universal availability for 2010.

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But ify ou're telling me "Effective opportunity" is not met, you need to point to where in paragraph 2 I have gone astray (at least I think so). How do you reconcile your conclusion with the following language from paragrph 2:

"Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including...the period of time during which an election may be made,"

" a section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election (as defined at §1.401(k)–1(a)(3)) between cash or a contribution to the plan"

Both of those seem to contemplate some administrative delays between DOH and date of first deferral.

Austin Powers, CPA, QPA, ERPA

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I quoted a sentence from (2) where you have a problem. It says effective opportunity includes the right to make deferrals up to the limit. How does an employee who is not allowed to defer at all for a given calendar year have the right to defer up to the limit for that year?

I think you also have a problem with the sentence you are using to try to justify a waiting period. It says "during each plan year". How does the person in my example have an effective opportunity to make a deferral election for the 2010 plan year if they are only allowed to make an election that is first effective in 2011?

I think facts and circumstances is a problem for a waiting period, too. An employee not being allowed to defer during a plan year is a pretty strong fact and circumstance indicating he does not have the opportunity to defer for that year.

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Is anyone else frustrated that no one can point to a document from the government that says "immediate eligiblity is required"? Why doesn't it just come out and say that? Shouldn't there be a reason that it doesn't just say that in plain simple English? Personally, I think there is a reason.

Now, I would never in a million years suggest anyone actually do this, however, I'm still troubled by the fact that it takes 2 giant sized paragraphs to simply say "eligiblity must be immediate on date of hire."

Austin Powers, CPA, QPA, ERPA

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1.403(b)-5(b) Universal availability required for section 403(b) elective deferrals

(1) General rule. --Under section 403(b)(12)(A)(ii), all employees of the eligible employer must be permitted to have section 403(b) elective deferrals contributed on their behalf if any employee of the eligible employer may elect to have the organization make section 403(b) elective deferrals. Further, the employee's right to make elective deferrals also includes the right to designate section 403(b) elective deferrals as designated Roth contributions.

I thought it was pretty clear about saying everyone must be eligible, unless they can be excluded. The effective opportunity rules are not written very well, but I don't see how they can be used to justify using a service requirement for deferrals in a 403(b).

The 401(k) regs are clear that service and entry date provisions can be used to determine eligibility to defer in a 401(k). If the IRS wanted to do the same with 403(b), I think they would have written something similar into the 403(b) regs.

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But you see, I have the exact same argument because 410(a) is EXTREMELY clear on what is a permissible service based eligiblity requirement. How annoying... I still someone could produce even a Q&A session where the IRS has confirmed this. Who knows, maybe it will show up in the OCtober Q&A.

Austin Powers, CPA, QPA, ERPA

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This is what TAG said:

There is not formal guidance. In the past, IRS officials have informally indicated that a short eligibility period may be permissible to the extent a newly hired employee was considered "on probation" for an initial period (e.g. 30 days or 90 days).

However, note that the language in the draft 403(b) prototype language issued by the IRS with Announcement 2009-34 does refer to an employee who is not excluded as being able to make deferrals"immediately upon becoming employed by the Employer". See below.

Austin Powers, CPA, QPA, ERPA

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  • 3 months later...

The IRS blessed ENTRY dates, not eligiblity periods. Point of clarification ;)

Question:

Are entry dates in a 403(b) plan permitted, or does entry have to be immediate upon date of hire for deferral purposes under the universal availability rules? It is possible to interpret Treas. Reg. § 1.403(b)-5(b) as allowing entry dates? Reg §1.403(b)-5(b) provides "A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only, if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election...". Is this an annual entry date, or more of an annual notice requirement?

Answer:

The 403(b) statute does not have specific rules to accommodate entry date requirements, but it is reasonable to have entry dates to make it administratively feasible. So, monthly entry dates work, maybe quarterly, but probably not semi-annually.

Austin Powers, CPA, QPA, ERPA

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But Ms HR Manager, I thought you said even though I'm a new employee I'm not excluded from making deferrals. Why are you making me wait? Well, even though you're not excluded, you're not included until the next quarter, or correction, I meant to say you "enter" next quarter. The IRS says I can call it not meeting entry.

Even with qualified plans, you don't view someone as a participant until they met entry. Sure, the employee first meets eligibility age/service "conditions", but they aren't a participant until entry. Here it seems we have to call them participants immediately because doing anything else means they're excluded for some reason but not a real participant until entry.

It would make more sense for the IRS to just simply say an employer may be given an allowance of several pay periods (or as soon as administratively feasible) to get deductions up and running (but not entry dates).

Isn't there a DOL perspective to this?

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  • 10 years later...

IRS FAQ: "The terms of the employer’s 403(b) plan govern when an employee may enroll. However, a 403(b) plan is generally required to allow all eligible employees to participate in the plan as of their employment commencement date (the universal availability rule)."

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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