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Santo Gold

Used to be FT, now PT. Still eligible?

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The 403(b) plan excludes those who work less than 20 hours/week. But when an individual is hired full-time and then is later a part-time individual (less than 20 hours/week), is it acceptable to automatically no longer permit that individual to make 403(b) contributions to the plan? The employer has been doing this and our question is whether this is a violation.

Thanks

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Legally, it is acceptable to exclude the employee if and only if the employee (a) currently normally works less than 20 hours per week, and (b) worked less than 1,000 hours in the preceding plan year. Of course, you would also have to look at the plan terms to make sure that they provided for the exclusion of such employees.

As QDROphile suggests, excluding such employees is not particularly good plan design. Since we are talking solely about amounts deducted from an employee's pay, allowing the employee to participate provides a substantial benefit to the employee at trivial cost to the employer. However, excluding such employees is not illegal.

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This is a 403(b) plan. If they let this person contribute, then they are REQUIRED to let ALL employees with less than 20 hours to contribute. Sorry, the person moved from an eligible to an ineligible class with the same results you would get in a 401(a) plan.

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I agree with rcline46. And, if this is an ERISA covered plan, they violate ERISA by excluding this person. We had this issue come up in an IRS audit before the final regs became effective and the agent told me that he had never seen a plan that had the <20 hour per week exclusion administer it properly.

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what if they were only exlcuded from matching contributions?

The universal availability rules for 403(b) deferrals discussed above don't apply to matching contributions. Unless you are talking about a church plan, having the match would make it an ERISA covered plan and using something like the <20 hour per week exclusion for eligibility for the match would violate ERISA.

Of course, they could accomplish basically the same thing by requiring 1,000 hours during the year as an allocation condition for the match. The non-elective and matching contributions in a 403(b) are subject to the same coverage and discrimination testing that they would be in a 401(k). See 1.403(b)-5(a).

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