Eligibility Issues: Equivalancies

[Guest STLGiant]

Generally speaking, an employee who works 20 hours or more per week is eligible for participation in a 403(B) plan. This is the equivalent of a calendar employee with 1000 hours of service that the Service uses in all retirement plans.

In the real world, those of us who work full-time work 40 hrs., 5 days a week, which is 2080 hours. I realize the Service uses 1000 hours as the equivalent to 2080 in a calendar year, however....

....here's the twist, the Service also recognizes equivalancies for periods that are not 12 months of employment.

In any given school district, there will be full-time, 12-month employees (administrators, clerical support, and custodial staff) as well as full-time, 9-month employees (generally all certified staff).

Question: If 1000 hours is equivalent to 12 months, is 750 equivalent to 9 months for the certified staff? Ergo eligibility in a district 403(B) plan be offered and extended to employees as follows:

1) For calendar year employees, those that generally work more than 20 hours per week.

2) For school year employees, those that generally work more than 15 hours per week.

Since the TVC sanction for excluding a participant is not a cheap one, what are people doing?

[mbozek]

STL: I am confused. The equivalency rule is only applicable to plans subject to ERISA and school districts are exempt from ERISA.

This question also comes up in academic institutions where instructors teach part time without a fixed number of work hours. The only applicable rule is the 20 hour requirement in 403(B)(12), not any equivalency rule or elapsed time method. Indeed the statute can be intrepretated to mean that an employee does not have to work a fixed number of hours but only needs to have normal work week of 20 hours.

I think the statute should be interpretated to make salary reduction available to all employee who normally work 20 hours, e.g., are scheduled to 20 hours a week, regardless of the number of hours actually worked. Most school districts have requirements as to regular work hours and pay on an hourly or pro rata basis e.g., 1/2 time, since positions have to be budgeted.

If this is problem why not permit all employees, except students, to make salary reduction contributions to avoid engaging in such a time wasting activity.

[Guest STLGiant]

MJB - Thanks for your comments. While I understand your argument, I'm not necesarily convinced that the intent is as clear cut as your post indicates. IRC 403(b)12 provides eligibility exclusion situations for Universal Availability as follows:

1) Contributions subject to one-time irrevocable elections;

2) For employees currently participating in any 457 arrangement, or another CODA of the employer (which provides the opportunity to sponsor multiple 403(B) arrangements--like one with just the superintendent participating and nobody else), if one is a non-resident aliens, if one is deemed a student employees AND for

"employees who normally work less than 20 hours per week."

I don't see anything that outlines what the intent is with respect to being scheduled "x" hours vs. actually working "X" hours, or whether or not the 20 hours per week is or is not based on an equivalancy.

20 hours a week * 52 =1000 hours in a plan year--utilizing rules as determined in accordance with regulations prescribed by the Secretary. If full-time employment can be deemed to equal a 9 month or 12 month period, it makes logical sense to state that 1000 hours over 12 months IS equivalent to 750 hours over 9 months--which approximately equals the school year. Therefore, I would think that one should never exclude a 9 month employees working 15 hours or more per week.

IRC 403(B)(4), defines Years of Service as "the number of years of service for purposes of this subsection, there shall be included--

(A) one year for each full year during which the individual

was a full-time employee of the organization purchasing the

annuity for him, and

(B) a fraction of a year (determined in accordance with

regulations prescribed by the Secretary) for each full year

during which such individual was a part-time employee of such organization and for each part of a year during which such

individual was a full-time or part-time employee of such

organization.

In no case shall the number of years of service be less than one."

Therefore, I question whether one can safely conclude that equivalency methods are exempt from 403(B) arrangements since public school plans are exempt from Title I of ERISA. Reading 403(B)(4)(B) doesn't give me that comfort zone.

As to why it's not a "time wasted activity", the issue is quite clear. The IRS is finding Universal Availability violations with respect to the exclusion of substitute teachers, non-contract bus drivers, clerical, custodial, and food service employees.

My understanding of 2 public school audits in MN and CO were that the CAP sanction included "creation" of accounts for some employees that were never made aware of the 403(B) program. Knowing how states are cutting education budgets, I suspect there is not moneys available in the school's budget for creating an account for eligible employees excluded by vendor rep since the vendor summarily excluded employees not working 20 hours a week.

[mbozek]

My comments were based on a statement in the IRS audit guidelines for 403(B) plans that there can be no age or 1 year of service reqirement for salary reduction contributions. The only exclusions are the ones explicitly stated in 403(B)(12). The way to avoid IRS reviews is to permit all employees except students to make salary reduction contirbutions. The exclusion of part time employees will be determined by the normal number of hours they are to work each week which should not be difficult since they will be paid on an hourly basis required under state labor law or the terms of a union agreement. Teaching positions are usually budgeted by full time or pro rata basis with reference to full time teaching or state laws. Besides most school districts are required under state law to get a hold harmless/indemnification agreement from a vendor to prevent the payment of penalities because of mitakes in administering 403(B) plans.

[Guest STLGiant]

Thanks for the clarification...At the ASBO-International Conference this past fall in Baltimore, I spoke with the attorney who wrote the IRS audit guidelines currently being used. (She's now in private practice in D.C.). Her interpretation as to the Code and her intent when working on the guidelines is closer to the 15 hours for a school year employee, 20 for a calendar year employee.

As to your statement on hold harmless agreements, would you care to identify which states that specifically mandate a hold harmless agreement be signed? I'm pretty sure MO doesn't, nor does IL. Maybe CA or TX do, possibly NY, but nevertheless, going back on what's been said on this Board before, most vendor HHAs (unless written FOR the district by outside counsel) provides too many loopholes for the vendor to escape liability.

The IRS answer on the 403(B) Q&As illustrates that they are not going to "wait upon the outcome of a District's legal action" to settle fines, penalties or CAP sactions, nor will the Service seek payment from the vendor directly. The HHA is just a potential legal avenue for the district to pursue--similar to attaching to a agent or brokers E&O.

[mbozek]

Your response indicated why the best advice to clients is permit salary reduction for all employees, except students, without regard to the number of hours worked so as to avoid the uncertainty of who normally works 20 hours a week. The failure of a HHA to provide protection is the result of poor negotiation. The purpose of the HHA is to provide a pool of funds to reimburse the SD for its costs which result from the actions of vendor which offsets the SD liability to the IRS.

[Guest STLGiant]

MJB:

Agreed on who should participate.

With respect to HHA, are you aware of any non-insurance/annuity company willing to sign a HHA you described? I might be able to agree with an insurance/annuity company signing something like that if it is somehow tied to their E&O--however, knowing some home office benefit attorneys, I can't see them agreeing to this kind of liability for their companies. Then again, how the vendor defines their role in the 403(B) and the District's role might create sufficient loop-holes to limit liability...

I don't know, the type of HHA you refer sounds like one dictated by state law--which goes back to my original quesition: Which States mandate HHAs for public school district 403(B) plans?

[mbozek]

I believe TX and some other southern states. I have seen 403(B) vendors walk awy from HHA which require the vendor to indemnify the SD/ state U for mistakes caused by the employer. I have also negotiated agreements on behalf of employers to hold vendors/PA liable for their own negilgence--in both 403(B) plans and 401(k) plans. I have never seen reasonable counsel for a financial company refuse to accept liability for the company's own acts of negligence. Requiring an advisor/administrator to exercise a level of due care is SOP in the financial services business for sophisticated investors, e,g., pension plans always require indemnification. The plan sponsor/sd will only get accountability from the vendor/service provider if it is demanded-- it will not be volunteered. The question is always the same --how much risk is a party willing to take. Once that is understood then an agreement can be drafted.