Can break-in-service rules be used without violating Universal Availability?

[Guest Grumpy456]

Can a 403(b) plan say that if a participant fails to work at least 500 hours during any eligibility computation period, that they cease to be an active participant because they are no longer an employee normally working more than 20 hours per week without violating the universal availability rule?

[J Simmons]

I think you can have the 403b plan say that for a plan year an employee will be excluded, without violating the universal availability rule, if during the prior plan year that employee had fewer than 1,000 hours of service. You could set the threshold lower, at 500 hours for exclusion that next plan year. However, I wouldn't feel comfortable with using eligibility computation periods that might not coincide with plan years.

[Guest Grumpy456]

Thanks, J. Simmons! The final 403(b) regs contain the following definition of "employee normally working fewer than 20 hours per week":

For purposes of paragraph (b)(4)(ii)(E) of this section, an employee normally works fewer than 20 hours per week if and only if--

(1) For the 12-month period beginning on the date the employee’s employment commenced, the employer reasonably expects the employee to work fewer than 1,000 hours of service (as defined in section 410(a)(3)©) in such period; and

(2) For each plan year ending after the close of the 12-month period beginning on the date the employee’s employment commenced (or, if the plan so provides, each subsequent 12-month period), the employee worked fewer than 1,000 hours of service in the preceding 12-month period. (See, however, section 202(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and regulations under section 410(a) of the Internal Revenue Code applicable with respect to plans that are subject to Title I of ERISA.)

My thought is that for a plan subject to ERISA, the emphasized text, if it has any meaning at all, means that it is OK (in fact, required) for the plan to satisfy ERISA Sec. 202(a). ERISA Sec. 202(b) contains the break in service rules and specifically says that, if used, will not violate ERISA Sec. 202(a). Code Sec. 410(a) contains companion rules including break in service rules.

The reason I asked is that one of the big 403(b) vendors has taken the position that once an individual has worked more than 1,000 hours in a plan year, due to (2), above, they are always and forever a participant at any time they are employed by the 403(b) sponsor--regardless of when they worked more than 1,000 hours (it could have been 20 years ago) or whether they do now (for the last five years they may have only worked 200 hours a year). Put differently, the rule the vendor is applying is once a participant, always a participant (when employed). The vendor couldn't site anything for its position--which likely is just an administrative rule of convenience.

Do you agree that if a plan says a participant experiences a break in service in any plan year during which they complete fewer than 500 hours and if a participant worked 1,200 hours in the 2006 plan year and 1,050 hours in the 2007 plan year, but then only 250 hours in the 2008 plan year that the participant can be ineligible to make elective deferrals or receive any sort of employer contribution beginning in the 2009 plan year and that he/she will continue in that inactive status until they once again work at least 1,000 hours in a plan year (all without violating the universal availability requirement applicable to elective deferrals)?

Thanks, in advance, for your help!

[J Simmons]

Yes, I agree. The interpretation the vendor gives the regulatory provision would make it hazardous to ever exclude anyone as it may some plan year in the future turn out that they work 1,000 or more hours. The vendor's interpretation would make having previously excluded the employee improper. An employer would have to know up front a worker's entire work history that is yet to unfold. Your interpretation, that it is a requirement on a year by year basis, seems much more reasonable.

[TLGeer]

This isn't something I've reviewed in nauseating detail, but I do have another alternative. The 403(b) regs use hours worked rather than hours of service, so if an ERISA plan required 1000 hours worked in the first ERISA eligibility computation period it would meet the 403(b) standard but not the ERISA one for the next year.

I find the vagueness of that particular part of the regulations very unfortunate. What does "reasonably expected" mean? Does "hours worked" absolutely track the meaning in the DOL Regs? How do ERISA and universal availability interact? Also note that "hours worked" doesn't mean hours worked under the DOL regs dealing with equivalencies (2530.200b-3(d)). And, of course, at what point did the employer "reasonably expect" the actual end result of 1000 hours worked result in the first year? I try to discourage use of the exemption, particularly when it is simple enough to impose eligibility standards on the match, if there is one. I just think we need a couple of Rev Ruls to clarify the ambiguities.

This is one of those areas where brains can get locked into one conceptual framework, so I'm very interested in your comments.

The one thing that is absolutely clear is that your vendor is wrong that 403(b) requires participation for all years after entry.

Tom Geer

[John Feldt ERPA CPC QPA]

Tom,

I just read this today, sorry to dig up an old post.

With your last statement, were you saying that if an employee in an ERISA 403(b) plan becomes eligible to defer, but then after some years, their schedule changes so their work hours can no longer be expected to be 20 hours per week (and they then actually work under 1000 hours in the year), that they can now be excluded from deferral eligibility?

If we look at (b)(4)(ii)(E) it has an 'and' in the middle, so both have to be true. (1) says the employee starts out with a schedule that expects under 1000 hours. (2) says for EACH plan year thereafter, the employee works under 1000 hours. Not just for some years, but all of them.

So, to exclude someone for deferrals purposes after they become eligible in an earlier year, what section are you applying to justify the exclusion? I am stuck in a maze of twisty little passages - please help!

edit: typo

[Guest Mr. Kite]

Tom,

I just read this today, sorry to dig up an old post.

With you last statement, were you saying that if an employee in an ERISA 403(b) plan becomes eligible to defer, but then after some years, their schedule changes so their work hours can no longer be expected to be 20 hours per week (and they then actually work under 1000 hours in the year), that they can now be excluded from deferral eligibility?

If we look at (b)(4)(ii)(E) it has an 'and' in the middle, so both have to be true. (1) says the employee starts out with a schedule that expects under 1000 hours. (2) says for EACH plan year thereafter, the employee works under 1000 hours. Not just for some years, but all of them.

So, to exclude someone for deferrals purposes after they become eligible in an earlier year, what section are you applying to justify the exclusion? I am stuck in a maze of twisty little passages - please help!

I agree. Additionally, there is a strong argument that the 20-hour exclusion cannot be used at all for a 403(b) plan subject to ERISA. I think it has been discussed in the message boards.

[Guest mjb]

Tom,

I just read this today, sorry to dig up an old post.

With you last statement, were you saying that if an employee in an ERISA 403(b) plan becomes eligible to defer, but then after some years, their schedule changes so their work hours can no longer be expected to be 20 hours per week (and they then actually work under 1000 hours in the year), that they can now be excluded from deferral eligibility?

If we look at (b)(4)(ii)(E) it has an 'and' in the middle, so both have to be true. (1) says the employee starts out with a schedule that expects under 1000 hours. (2) says for EACH plan year thereafter, the employee works under 1000 hours. Not just for some years, but all of them.

So, to exclude someone for deferrals purposes after they become eligible in an earlier year, what section are you applying to justify the exclusion? I am stuck in a maze of twisty little passages - please help!

I agree. Additionally, there is a strong argument that the 20-hour exclusion cannot be used at all for a 403(b) plan subject to ERISA. I think it has been discussed in the message boards.

Given the low participation rates in salary reduction 403b plans and the complexity of the regulations can any one explain what benefit an employer will derive from applying the 20 hour a week rules to limit participation in a 403b plan. It seems that the only persons who benefit are the lawyers.