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Belgarath

20 hour exclusion NOT to apply to part-time union employees

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Belgarath    341

Oddball question - a 403(b) plan proposes to use the 20-hour exclusion. It is a 501©(3) plan subject to ERISA, and the plan has the appropriate "fail-safe" language if they ever go over 1,000 hours.

Now, they have a small collective bargaining unit agreement in place for a few employees, where the collective bargaining unit employees can participate regardless of hours.

1.403(b)-5((b)(4)(i) generally provides that if any employee in (4)(E) is included, then NO employee under (4)(E) may be excluded.

Does this preclude allowing the part-time union employees to participate, or does the general "you can do pretty much anything you want with unions where the agreement is subject to good-faith collective bargaining) override this?

I'm inclined toward saying it is ok, but I'm not sure I'm specifically getting there based upon the regs. I don't really read 410(b)(4) as specifically supporting where the client wants to be.

Any thoughts?

Edited by Belgarath

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Lou S.    242

I'm 99% sure this would be OK in the 401(a) side as the collective bargained ee's are almost treated like there own sub plan within a plan. But I don't work with 403(b) so I'm not sure how the interaction extends in that arena.

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Belgarath    341

Yeah, it strains the boundaries of what is reasonable to think that by including part-time union folks while excluding an otherwise excludable "less than 20 hour class" that you would fail universal availability, yet that's where the regs (and the specific reference to 410(b)(4)) seem to lead. I'm hoping I'm missing something obvious, or not so obvious.

P.S. Perhaps they could just set up two plans - one for the non-union, which would exclude all union employees; and one for the union employees, which would exclude all non-union employees. Would this solve the problem?

Edited by Belgarath

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Kevin C    155

Any chance the special rules in 1.403(b)-5(b)(3) might help?. The universal availability rules can be applied separately if more than one 501©(3) entity is included in the plan. You can also apply it separately to geographically distinct units. I don't see anything in 403(b)(12)(A) or 1.403(b)-5 that lets you treat collectively bargained employees differently for the < 20 hour per week exclusion.

Your two plan idea should work if the union plan is a 401(k). The regs say that if any employee who could be excluded under the <20 hours exclusion has the right to make 403(b) deferrals, then no employees can be excluded under the <20 hours exclusion. If the union plan is a 401(k), then none of the <20 hours union employees would be eligible to make 403(b) deferrals. If the union plan is a 403(b), I read it as saying you can't exclude those <20 hours in the non-union plan. It would probably be easier to just let everyone participate.

Edited by Kevin C

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K2retire    104

I have a somewhat related situation that I'm hoping you can help me figure out.

I have a 403(b) plan that excludes employees who normally work less than 20 hours per week. The plan allows for both salary deferrals and employer match.

The document makes no mention of union employees. They have a number of union employees for whom they make mandatory contributions to the union's plan.

An employee who works on a per project basis that was expected to meet the hours exception ended up working 1072 hours in the year ended 6/30. He is also one of the employees covered by the union plan. Does he have to be covered in the 403(b) plan?

Edited by K2retire

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Belgarath    341

Looking first at a possibly simple solution, if they don't really care if the one union employee defers.

They could exclude union employees from receiving any employer match. This, in and of itself, wouldn't keep the employee from eligibility for deferrals, but might possibly be a practical short term solution? (odds are good that the union employee won't defer regardless)

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K2retire    104

Going forward, that seems to be a good solution. Unfortunately, we're looking at a QNEC and match for the time that this person was excluded because the employer didn't realize he had to be included.

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K2retire    104

Now I'm really confused. An article in Plan Sponsor quotes Mary Lou Bailey-Fund, senior internal revenue agent, Office of Employee Plans, as saying, "...if the employee was hired with the expectation they would work less than 1,000 hours in a 12-month period, but they work more hours than that, they can continued(sic) to be excluded."

Edited by K2retire

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Belgarath    341

Don't know the context of the rest of what was being said. If in the first year, employee goes over 1,000, then would have to be covered starting in year 2. For example - hire date of 1/1/2016 - "expected" to work less than 1,000 hours, so is excluded. But ends up working more hours for whatever reason, hits 1,000 hours in September. Doesn't have to be covered (eligible) for remainder of 2016, but will be eligible as of 1/1/2017, and all years thereafter.

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Kevin C    155

K2, The regs should help with your question.

1.403(b)-5(b)(4)(iii)(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.)

For the initial plan year of employment, eligibility is determined by expected hours of service. For later plan years, eligibility is determined by actual hours in the prior plan year.

For your question in post #5, the person is not a participant for the year ended 6/30/16 because he/she was not expected to work 1,000 hours in his/her first 12 months. When he/she did work 1,000 hours in the plan year ending 6/30/2016, he/she became eligible 7/1/16.

I suspect the article you quote is saying that the person doesn't become eligible mid-year when they reach 1,000 hours during the year. But, rather, they become eligible at the beginning of the following year.

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My 2 cents    248

Now I'm really confused. An article in Plan Sponsor quotes Mary Lou Bailey-Fund, senior internal revenue agent, Office of Employee Plans, as saying, "...if the employee was hired with the expectation they would work less than 1,000 hours in a 12-month period, but they work more hours than that, they can continued(sic) to be excluded."

Not sure if this is in the context of 403(b) plans. I don't work with 403(b) plans. My experience is with defined benefit plans. Expected or not, working 1,000 hours in an eligibility computation period as defined in the plan is and has always been the magic word that makes the person eligible for the plan (unless in an excluded status, and ERISA plans cannot use "part-time employee" as an excludible status). Sounds as though Ms. Bailey-Fund was misquoted or there is something key in the context that is not being mentioned.

Eligibility is not subjective - expectations that the person will not work 1,000 hours are irrelevant (at least under plans subject to ERISA).

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Belgarath    341

I agree with Kevin. That's what I was saying as well, although I was using a calendar year plan as an example, since I find it easier to illustrate calendar years...

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Kevin C    155

My 2 Cents, it's a 403(b) thing.

Although, it is possible in the 401(a) world to have different eligibility requirements for full and part-time employees, as long as the part-time employees enter if they complete a year of service. Our current VS document allows it.

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K2retire    104

Thanks for the clarification.

The participant in question was hired in 1991 and first went over 1000 hours in the 6/30/2016 plan year. Apparently the expectation was reasonable. So he is in for the year ended 6/30/2017. If he goes back to fewer than 1000 hours in that year, does he stay in?

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My 2 cents    248

Thanks for the clarification.

The participant in question was hired in 1991 and first went over 1000 hours in the 6/30/2016 plan year. Apparently the expectation was reasonable. So he is in for the year ended 6/30/2017. If he goes back to fewer than 1000 hours in that year, does he stay in?

My vote is that he stays in but accrues no additional service until/unless works 1,000 hours in a year.

Remember - NRA is based on 5th anniversary of entry, not completion of 5 years of service.

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Kevin C    155

Thanks for the clarification.

The participant in question was hired in 1991 and first went over 1000 hours in the 6/30/2016 plan year. Apparently the expectation was reasonable. So he is in for the year ended 6/30/2017. If he goes back to fewer than 1000 hours in that year, does he stay in?

That's the problem with using the less than 20 hours per week exclusion for an ERISA covered plan. When you follow the IRS regulations, he will no longer be a participant for the year following the year he completes fewer than 1,000 hours. But, as My 2 cents points out, that would violate ERISA. To make matter worse, under the IRS regs, if you include one person who could be excluded under the less than 20 hour exclusion, you are no longer allowed to use the exclusion.

This is supposed to be fixed in the pre-approved 403(b) documents that are expected to be available next year. The other way to deal with it is to stop using the less than 20 hours per week exclusion. We had a pre-2006 final reg IRS audit on a 403(b) where the less than 20 hours per week exclusion became an issue. The supervising IRS agent told me he had never seen a 403(b) plan that used the less than 20 hours exclusion that did it properly.

Currently, all of our 403(b) plans are Church plans, so none of this applies to them.

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