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Belgarath

20 hour exclusion

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This is a constant headache. If we were smart, I swear we wouldn't allow it, but there is great demand for it.

Anyway, suppose you are utilizing this exclusion. Someone who is HIRED at 8 hours per week, and is therefore "reasonably expected" to work less than 1,000 hours, is subsequently put on full time. Let's further suppose it is a calendar year plan, DOH is February 15, 2019 and full time status starts in July of 2019.

Does the person (A) enter immediately in July, since no longer "reasonably expected" to work less than 1,000 hours in the initial computation period, or (B) does the person actually have to work the 1,000 hours, and therefore subsequently enters on February 15 of the following year, (2020) when the initial computation period is complete?

Even if (b) is the more technically correct answer (which it is IMHO) do you think it is reasonable to interpret it, as long as done consistently, such that you use (A) instead?

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While I haven't seen the situation you mention directly addressed, I think the first year exclusion rule needs to have the reasonable expectation of how many hours the employee will work in the first 12 months be determined at hire. Otherwise, a revised expectation during the first 12 months of employment would result in a universal availability failure because someone was improperly excluded for part of their first year. 

Notice 2019-59 does have a situation where an employee was reasonably expected to work 1,000 hours when hired, but the employer probably would have realized fairly quickly that the initial expectation was not going to be accurate.  Notice 2018-59, Section 3.03, Example 1 has an employee reasonably expected to work at least 1,000 hours in the first year, but actually works 500.  It says the initial expectation makes the employee eligible to defer for the initial (and all later) years.  I think that makes it clear that a reasonable expectation of at least 1,000 hours for the first 12 months determined at the date of hire doesn't change at a later date.   

I agree that the best approach is to not use the <20 hour per week exclusion.  Fortunately, all of our current 403(b) plans are non-electing Church plans that are not subject to universal availability for deferrals.

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I'm not a 403(b) person but I would go all-in for immediate entry in July.

I'll do a 401(k) comparison - you allow immediate entry but categorically exclude part-time employees unless/until they work 1,000 hours. Person starts PT, they are in excluded class, so not eligible. Two months in they switch to full time, so longer in excluded class and enter immediately. As I said, not a 403(b) person but don't see your situation as any different - and this manner is certainly consistent with the spirit of the rules.

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Forgot to mention, 1.403(b)-5(b)(4)(iii)(B)(2) gives two options for the time period used after the initial year determination.  You can use either plan years or anniversary years.  The option used in the plan document will affect when the person enters.  Our 403(b) document (ASC) uses plan years.

For (B) of your example, if reasonably expected to work < 1,000 hours in the first 12 months, hired 2/15/19 and then changes to full time 7/1/2019, that would be more than 1,000 hours in plan year 2019, so in a plan that uses the plan year, he/she would enter 1/1/2020. If the plan uses years based on the anniversary of employment, entry would be 2/15/2020. 

 

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Hi Kevin - thanks for the input. The plan uses an initial computation period of 12 months from DOH, then reverts to plan year. So computation period 1 would be 2/15/19 to 2/14/20, then computation period 2 and subsequent would be plan years. And as consider it further, I think that means that entry would be 1/1/2020, not 2/15/2020.

Well, actually I think it will still be 2/15/20...seems inconsistent with the above to end up with the entry date being at a time during that initial eligibility computation period.

Sheesh.

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Entry would be 1/1/2020.  From Notice 2018-95, Section 2.02(1):

Quote

Thus, the provision imposes three separate conditions for an employee to be excluded from making elective deferrals under the part-time exclusion: (1) a "first-year" exclusion condition, (2) a "preceding-year" exclusion condition, and (3) the OIAI exclusion condition. Under the first-year exclusion condition, in order to exclude the employee from making elective deferrals, the employer must reasonably expect the employee to work fewer than 1,000 hours during the employee’s first year of employment. Under the preceding-year exclusion condition, in order to exclude the employee from making elective deferrals in an exclusion year ending after the first year of employment, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period. Under the OIAI exclusion condition, the employee may be excluded under the part-time exclusion if and only if, in the employee’s first year of employment, the employee meets the first-year exclusion condition, and, in each exclusion year ending after the first year of employment, the employee has met the preceding-year exclusion condition. The effect of the OIAI exclusion condition is that once an employee does not meet the part-time exclusion conditions, whether in the initial year of employment or for any exclusion year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion.

The employee in your example was excluded under the first year exclusion condition because the employee was expected to work less than 1,000 hours in the first 12 months.

The next step is the preceding year exclusion condition. With your plan document and a 2/15/19 date of hire, the first exclusion year is the first plan year ending after 2/14/20, or the 2020 plan year.  The employee can only be excluded for the 2020 year if he/she worked less than 1,000 hours in the prior 12 months. In your case, it was more than 1,000 hours in the prior 12 months, so he/she must be eligible for the 2020 (and later) plan year(s). That means entry on 1/1/2020.

If the plan switches to plan years for the determination, except for someone hired on January 1, the first preceding year exclusion determination will always be before the end of the employee's first 12 months of employment.  The exclusion year is a plan year, so later entry will always be on the first day of the plan year.

Now, if the plan applied the <20 hour per week exclusion using 12 month periods based on the date of hire, entry would be 2/15/2020.

 

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Seems like using the <20 hour exclusion would therefore realistically require using 12 month periods based on date of hire - otherwise you end up with most employers not properly tracking the hours to make an accurate and TIMELY determination for a 1/1 entry date, and now you have missed deferral opportunity corrections, etc., etc. - yuck. Theoretically reverting to plan year is fine, but in the real world of plan admin, that data is never given accurately and timely (really, for this, in advance). Ah, that's why we love our jobs...

P.S. - lest anyone read this otherwise, I am absolutely NOT suggesting that Kevin doesn't understand the real world of plan administration! Just my musing/blathering on an unpleasant and difficult topic.

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While I agree that using the <20 hour per week exclusion is a train wreck waiting to happen, I think using anniversary years for the later determinations makes it even worse.  When you switch to plan years, at least all of the later determinations can be made at the same time.  With anniversary years, the determination is potentially made at a different time for each employee.  I think that makes errors more likely.  And, if you mess up with one person, you can't use the exclusion.

As you note, without timely and accurate data, it will be impossible to comply with the rules for the exclusion.  I've mentioned before that I had an IRS agent, who was the training agent for 403(b) audits in our region at the time, tell me that he had never seen a plan that used the <20 hour per week exclusion do it correctly. 

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Thanks Kevin - we actually had one large plan that uses this exclusion get audited by the IRS. However, this one did it right in that they NEVER had a "less than 20 hour" person work over 1,000 hours. Can't count on that...

 

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