universal availability and the 20 hours/week rule

[Guest Mr. Kite]

Client has a large number of employees who normally work fewer than 20 hours/week, but occasionally someone will work over 1,000 hours during a year. Under the plan, once an employee hits the 1,000 hour mark, he or she may contribute to the plan for the remainder of the year (but no contributions allowed come January 1).

Arguably this is a reasonable interpretation of the exception to the universal availability rule, but it doesn't comply with the proposed regulations, so the client is planning to change to comply with the definition in the regs (assuming the definition carries over to the final regs coming out any minute now).

The proposed regs (1.403(b)-5(b)(4)(ii)(E)) indicate that an employee falls into the fewer-than-20-hours group "if and only if" (1) in the employee's first 12-month period the employer does not expect the employee to work more than 1,000 hours, and (2) for "each plan year" afterwards the employee works fewer than 1,000 hours in the preceding year.

It is not clear to me whether an employee who hits the 1,000 hour mark will ever again be excluded under this rule. The "if and only if" language is quite strict, and once an employee hits the 1,000 hour mark it appears the second prong is blown -- the employee is not under 1,000 hours "for each plan year" after the initial 12-month period.

How have others been interpreting this language? I haven't come across any guidance or commentary on this specific issue.

[Guest mike webb]

The proposed regs are designed to mirror the qualfiied plan rules in this regard, where, once the year of service/1,000 hour requirement is met, the individual can never be excluded again under this rule, regardless of the number of hours worked.