Less Than 20 Hours Per Week Employees

[Scott]

Section 403(B)(12) provides that, for purposes of applying the nondiscrimination rules of that section, a plan may exclude "employees who normally work less than 20 hours per week." What does "normally" mean? For example, how do you treat a part-time employee who works more than 20 hours some weeks, and less than 20 hours other weeks?

[Ellie Lowder]

Verbal discussion w/IRS people in the Employee Plans Division don't shed a lot of light on what "normally" means. The upshot appears to be that employers will be wise to permit employees that MAY work more than 20 hours per week to participate if they going to contribute more than $200 per year. Since this has been reported as a common violation on audit, and the final examination guidelines discuss this defect extensively, it is best to err on the side of conservatism.

[Note: This message has been edited by CVCalhoun]

[MWeddell]

If a 403(B) plan is subject to ERISA, then I think one has to let an employee participate once he or she has 1,000 hours of service during an eligibility computation period. I don't see the "employees who normally work less than 20 hours per week" 403(B) rule in ERISA.

[Ellie Lowder]

See Section 403(B)(12)(A)(ii), nondiscrimination rules applicable to "universal eligibility" for elective deferral 403(B) plans.

[MWeddell]

To clarify my earlier posting, the "employees who normally work less than 20 hours per week" 403(B) rule is in Code Section 403(B)(12) but I don't see similar language in ERISA Section 202. Hence, it looks to me like if a 403(B) prograom is an ERISA pension plan that ERISA Section 202 requires that once on employee has attained age 21 and has 1 year of eligibility service, the employee can't be excluded from eligibility on the grounds that he/she normally work less than 20 hours per week.

Can any one confirm this view or show me why it's wrong?

[Guest Brent Rowell]

I believe that 20 hours per week and 1000 hours per year are considered equivalent and intended to be the cutoff point between "full" and "part-time" employment.

I would think an employer would allow salary reduction agreements for all employees and only invoke part-time limits on employer contributions

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Brent

[Dowist]

The way I look at it the 20 hours a week exclusion could be a violation of ERISA if the plan is subject to ERISA. So if you've got an ERISA plan and you want to keep these people out, you need to have one of those provisions that says you're excluded if you don't normally work 20 hours a week, but that if you actually have 1000 hours of service at the end of the year that you'll come into the plan. I would think that you would be ok to bring them in prospectively at that point - the 1000 hour standard is an ERISA standard that does not require immediate participation.

If you're not an ERISA plan, I see no problem with the 20 hours exclusion, provided that it is administered in a reasonable, uniform and nonarbitrary way.

The 20 hours a week standard is a factual issue - if the employer actually makes a determination that the employee doesn't normally work 20 hours a week when the employee is first employed, and if that status is reviewed regularly, I would think the employer would be ok.

The problem would be if the standard was used arbitrarily - for example, if the employer used it to exclude all "contract nurses" or all temporary employees, without regard to whether the employees really worked more than 20 hours a week (because of special situations, overtime, etc.)