Once In Always In

[austin3515]

Am I a newbie who knows nothing, or is this "weird IRS interpretation" ERISA 101?  They make it sound as though no one was following ERISA?  All the plan documents I have include the "safe harbor/1,000 hours in 12 months makes you eligible" language.

http://www.businessofbenefits.com/2017/10/articles/403b/403b-document-delays-the-once-in-always-in-rule-and-the-effective-date-addendum/

[ETA Consulting LLC]

I remember a discussion on this a few years ago.  The question is what does "normally work 20 or more hours per week" mean.  The IRS's Regulation on the issue appear to say "has ever worked 1000 hours during 12 months" (which was my argument), but that language appears to have been vague.  So, you can have an employee that worked 1000 years, but as soon as it is not longer "normal that they work 20 or more hours per week", the question is do they fall out of the plan.

This pertains to only the 403(b) provision for making elective deferrals.

Good Luck!

[austin3515]

I disagree though - ERISA is very clear that you can no longer have a service based provision that excludes someone who has met statutory eligibility.  They had a reg or notice on a practial way to define 20 hours a week, but it included that statutory catch-all of "if you work 1,000 hours in an eligibility computation period your in."

[austin3515]

Wow, I just realized something. The article does not appear to differentiate between an ERISA versus a non-ERISA Plan. That seems like an oversight to me (but I missed it, I read it super-fast, but did a key word search for ERISA and do not find the word...)

[ETA Consulting LLC]

1 hour ago, austin3515 said:

Wow, I just realized something. The article does not appear to differentiate between an ERISA versus a non-ERISA Plan. That seems like an oversight to me (but I missed it, I read it super-fast, but did a key word search for ERISA and do not find the word...)

And that is important, since this issue is specifically dealing with the deferral portion of a 403(b) plan.  Hence, the Regulations are specific to that area (which may or may not be an ERISA plan).
Good Luck!

[Peter Gulia]

The “once in, always in” provision Bob Toth describes is the IRS’s effort to get a provision that contravenes neither IRC § 403(b)(12)(A)(ii) nor 26 C.F.R. § 1.403(b)-5(b)(4)(iii)(B), and provides some employees more protection than the statute or its regulation requires as a condition to IRC § 403(b) tax treatment.

 

Under IRC § 403(b)(12)(A), a plan may (without failing to meet a tax-Code nondiscrimination condition) exclude from a right to make salary-reduction contributions “employees who normally work less than 20 hours per week.”

 

For a plan year that ends later than 12 months after the employee’s employment commenced, 26 C.F.R. § 1.403(b)-5(b)(4)(iii)(B)(2) treats an employee as one who normally works fewer than 20 hours per week “if and only if” she “worked fewer than 1,000 hours of service in the preceding 12-month period.”

 

In the IRS’s “sample” provision for a § 403(b) pre-approved plan, most of its text is a paraphrase of 26 C.F.R. § 1.403(b)-5(b)(4)(iii)(B), but its last sentence is not.

 

Also, 26 C.F.R. § 1.403(b)-5(b)(4)(iii)(B)(2) includes a parenthetical citation sentence that cautions a reader to consider ERISA § 202(a)(1) for a plan that ERISA’s title I might govern.

[Kevin C]

And to make matters even worse, the <20 hours per week exclusion, first listed in 1.403(b)-5(b)(4)(ii)(E) has this restriction from 1.403(b)-5(b)(4)(i)

Quote

... 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).

 

So, the IRS regs say people go in and out of the plan based on their hours in the prior year, or you can't use this exclusion.  But, doing so violates ERISA. Based on a recent discussion with our document provider, it appears the IRS is expecting a retroactive amendment imposing the ERISA once in, always in rule onto the <20 hours per week exclusion.  That could be a problem for any non-ERISA 403(b) that actually followed the IRS regs for this exclusion.  I'm really glad all our 403(b) plans are Church Plans that are not subject to the Universal Availability requirement.  

[Peter Gulia]

That a document has an IRS opinion letter doesn't relieve a plan's sponsor from a need to read and understand everything the documents say.  Or if a plan's sponsor doesn't want to do the reading, to get someone knowledgeable to read and explain the documents.

 

[Kevin C]

Peter,  I'm not sure I get your point.  Are you referring to needing to read and understand the coming restatement?  Or, something else?

 

We realized by 2008 that it wasn't possible to comply with both the regulations and ERISA when it comes to the <20 hour per week exclusion.  We only had one non-Church plan that used the <20 hours per week exclusion prior to 2009 and it was amended to remove the exclusion effective 1/1/2009.  There were several discussions here at the time.

[Peter Gulia]

In my experience, many users of preapproved documents fall into this trap for the unwary:

 

The user assumes a document’s provisions (beyond choices deliberately selected in an “adoption agreement” form) impose exactly what’s necessary to get the § 401(a) or § 403(b) tax treatment.  That a document can impose an obligation that isn’t necessary to get the tax treatment is beyond what a typical user imagines.

 

For many users, the expenses and other costs of not using a preapproved document result in a decision to fall in with a preapproved document, even if the document states provisions the sponsor doesn’t want (and that otherwise might not be required under applicable law).

 

But an employer won’t know it needs to administer a provision it didn’t ask for unless the employer reads the document to learn the unanticipated provisions.

 

An employer that maintains a plan not governed by ERISA might not have imagined the “once in, always in” provision.

 

And this is just one of many gaps that can result from using a preapproved text that might impose an obligation that isn’t necessary for every user plan.