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No HCEs in 403(b) Plan. Does Universal Availability Still Apply?

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A client sponsors a 403(b) plan for its employees.  However, there are no HCEs who are eligible to participate in it.  Does the plan still have to satisfy the universal availability requirement?

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Yes.  Section 403(b)(12) does not include an exception for a plan without HCEs.  That makes no sense, as you point out, but it's still there.

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"makes no sense" is an extreme conclusion.  You may say that it seems incongruous with the apparent principles underlying rules that apply to qualified plans.  All of the tax rules are arbitrary at some level.  We try to make sense of them by discerning patterns and paying attention of statements of intent by those who make the rules.  

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Which is why the OPs question is a good one. Many laws and regulations have a lot of exceptions and exceptions to the exceptions. If the intent of the "universal availability" rule was to exempt the plan from ADP tests, then if such plan has no HCEs, why would the law still require the universal availability requirement to apply?

Well of course, as stated above, the answer is because there are no exceptions this time, maybe a 401(k) plan will suit the company better!

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I'm sure you've considered this, but since the universal availability requirement applies only to deferrals, it isn't necessarily that big a deal anyway. And if a governmental (public school) 403(b), you can be as discriminatory as you want to be on the employer contributions (obviously not race, religion, gender, etc...)

I'm so conditioned to being paranoid about nondiscrimination in "regular" plans that I sometimes have to take a step back and reset my thinking when a governmental plan question is involved.

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On 3/17/2017 at 3:59 PM, John Feldt ERPA CPC QPA said:

Well of course, as stated above, the answer is because there are no exceptions this time, maybe a 401(k) plan will suit the company better!

That assumes it is a private 501(c)(3).  If it's a public school or university, a 401(k) would be unavailable (unless grandfathered).

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On 3/17/2017 at 2:48 PM, QDROphile said:

"makes no sense" is an extreme conclusion.  You may say that it seems incongruous with the apparent principles underlying rules that apply to qualified plans.  All of the tax rules are arbitrary at some level.  We try to make sense of them by discerning patterns and paying attention of statements of intent by those who make the rules.  

I still have the odd view that the workings of a statute or other authority should result in the intent of the statute or other authority being fulfilled.  And that it makes no sense when this does not happen.

It's like my view of VCP and governmental plans.  It is clear that VCP does apply to governmental plans.  But the whole point of VCP was to encourage employers to come forward, knowing that the penalties for doing so are less than the penalties if they get audited.  For governmental plans, in which the penalties on the employer if they get audited are typically nonexistent (deductions aren't at issue, and the trust is tax-exempt even if disqualified), it makes no sense to apply penalties if they come forward.

"Incongruous" might go into a formal memo to a client.  But I'm allowed my occasional rant here.

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Ranting is appropriate, certainly for this subject.  You have license to rant and it does not need renewal..

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