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AlbanyConsultant

EE now working <20 hrs/wk... exclude going forward?

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Hi. This particular 403b plan has the exclusion for those that normally work less than 20 hours per week.

An employee who had been full time (and there a participant) is changing her hours down to per diem, and expected to be <15 per week (though the plan sponsor at this point can't guarantee that). Does she now fall under the exclusion and is therefore unable to defer going forward? That would be consistent with treating this as a 'class exclusion'; she's now part of an ineligible class, have to test under 410(b), etc.

Or is this a special case so therefore once she is allowed to defer, she is always allowed to do so? Thanks.

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Plan documents are usually explicit about what happens when an employee's classification changes from included class to excluded class. It's worth a look.

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This may actually be driven by the Regulations; even though the answer may be found in the plan document. Normally, an individual who's a member of a class that becomes excluded from participation may be excluded. But, this issue goes to the actual definition of what is means to be an employee 'who normally works less than 20 hours per week'. The Treasury Regulations provide a 1000 hour definition to the year when determining whether an employee is in this class. Once it is met in any year, then that employee is deemed to meet the 20 hour requirement regardless of what 'happens next'. This is how I interpret the "if and only if" provision in the Regulations that define this class.

Good Luck!

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(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.)

FWIW, we had an IRS audit of a 403(b) plan for the 2008 plan year where the agent tried to apply the current (2009) rules. His position was that someone who dropped below 1,000 hours became ineligible the following year and if you included them, regardless of the reason, you were no longer allowed to use this exclusion. At the time, this agent trained other agents in our region on 403(b) audits This conflict between the IRS 403(b) regs and ERISA is supposed to be resolved in the coming pre-approved 403(b) documents, but until then, the only advice I've heard from the IRS is don't use the <20 hours per week exclusion.

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FWIW, we have now received a DRAFT document from our provider. Major changes are not anticipated, but it ain't over 'till it's over. At this point, it retains the provision that for an ERISA plan, "once in always in" for purposes of the 20 hour exclusion.

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