403(b) Eligibility

[Guest amm19]

Under recent legislation, immediate eligibility for salary reduction contributions was enacted with limited exclusions. One of the exlusions is for part-time employees (i.e. 20 hours per week employees). What happens when a full-time (40 hour per week) employee changes status, for example on-call status? Are they now excluded from making salary reduction contributions?

[GBurns]

I must have missed it.

What recent legislation changed eligibilty in such a manner?

[Ellie Lowder]

Nondiscrimination requirements for elective deferrals to 403(B) plans (IRC 403(B)(12)(A)(ii) have not been changed recently. Under the "universal eligibility rule" you must permit employees who "normally" work 20 or more hours per week to participant if ANY employee is permitted to do so. You are not required to exclude employees who work less than 20 hours per week!

That Code section does include those you are permitted to exclude.

[GBurns]

Since the rules have not changed, I have to ask amm19 to explain what they mean.

[Carol V. Calhoun]

I think that some of the issue here may be the definition of "recent." To some of us old-timers, 403(B)(12) itself seems like a recent development. (Sorry, folks, just had another birthday, and have been reminded by my children that I really am older than the dinosaurs!)

However, you are right that federal law is not necessarily clear on exactly when an employee who changes status becomes eligible/ineligible for the exclusion. For example, in determining whether someone "normally" works more than 20 hours a week, do you treat them as in the excluded category the very week that they switch from a 40-hour a week position to a 15-hour a week one? Or do you look at the issue on a year-by-year basis, treating them as eligible for a particular year if their hours averaged more than 20 per week for that year? The IRS examiners often seem to take an informal position that individuals who work less than 1,000 hours a year (20 hours per week times 50 weeks) can be excluded. However, on a practical basis, this may cause problems inasmuch as a decision on participation must be made before contributions can begin, and it may be unclear until the end of the year whether the 1,000 hours requirement will be met.

As a practical matter, we tend to suggest that employers err on the side of letting in as many people as possible. Since employers are permitted (though not required) to include those who work less than 20 hours a week, letting them in will not cause problems under federal law, while keeping them out in uncertain situations might.