Entry dates/Salary Deferrals/403b

[Guest DebN]

New to 403(B)...In designing a 403(B) plan, you are eligible to begin salary deferrals immediately on hire date. Is it possible to have quarterly entry dates? Or is part of the universal requirement, that there can absolutely not be any waiting period?

[Carol V. Calhoun]

Unless someone meets one of the very limited exceptions in Internal Revenue Code section 403(B)(12), the person must be allowed to contribute, regardless of length of service.

[Guest Serena]

WHat about a church plan? Could they have quarterly entry dates for deferrals since they are not subject to universal availability/

[John Feldt ERPA CPC QPA]

Since church plans are not subject to the universal availability rules, then yes, you could have service requirements, including a requirement to reach an entry date.

[oldman]

I had a plan that established quarterly entry dates for employees wishing to defer their compensation. This would be allowed because Section 1.403(b)-5(b)(2) provides that "A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election". Note that effective availability is one requriement under universal availability. A plan may provide for effective availability and still fail the universal availability rules.

[John Feldt ERPA CPC QPA]

I had a plan that established quarterly entry dates for employees wishing to defer their compensation. This would be allowed because Section 1.403(b)-5(b)(2) provides that "A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election". Note that effective availability is one requriement under universal availability. A plan may provide for effective availability and still fail the universal availability rules.

Are you saying that a 403(b) plan (but not a church plan) can exclude employees from making deferrals until they have met a plan entry date, and that would not violate the universal availability rule?

[oldman]

Section 1.403(b)-5(b)(1) provides "A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only, if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred electiopn..." I am more disposed to take a more conservative approach in that the intent was for all employees be given the opportuntiy to defer in a reasonable period of time, i.e., first payroll period following date of hire. However, the plan sponsor determined that the quarterly entry dates complies with the regulation and absent any guidance from the IRS on this matter, this provision was implemented.

[30Rock]

Could this regulation be part of the annual notice requirement, where you have to offer the plan at least annually which is the notice requirement. However that does not really have anything to do with entry dates. I have not seen any 403b plan document, including the proposed LRMS, that allow you to elect an entry date. They all state date of hire or immediate.

[30Rock]

Check the IRS Q&A this October and see if they answer this question.

[30Rock]

(b)lines Ask the Experts – Universal Availability and Immediate Deferral

July 13, 2010 (PLANSPONSOR (b)lines) – A reader says: “I have been told that the new regulation for Universal Availability requires employees be allowed to defer immediately to the plan.

“Therefore, in all 403(b) plans today, employees must be immediately eligible to defer but the plan sponsor can put an eligibility requirement on the match. Is this correct?”

Mike Webb, Vice President, Retirement Cammack LaRhette Consulting , answers:

You are generally correct, but, as is the case with most regulations, there are exceptions to the general rule.

Unlike 401(k) plans, which allow eligibility requirements such as a waiting period to be imposed with respect to elective deferrals, 403(b) plans generally allow all employees the right to make elective deferrals to the plan upon date of hire, in what you label accurately as the Universal Availability requirement. Over the years, several exceptions have evolved to the Universal Availability rule, most notably for collectively bargained employees.

However, the final 403(b) regulations eliminated the collectively bargained exception and restricted the exclusions from the right to make elective deferrals to the following groups:

•Employees who will contribute $200 or less annually;

•Employees who participate in a 401(k) or 457(b) plan, or in another 403(b) plan;

•Nonresident aliens with no U.S. source income;

•Employees who normally work less than 20 hours per week (note that hours MUST be tracked in order to administer this exclusion); and

•Students performing services described in Code §3121(b)(10) (generally, those enrolled in a post-secondary educational institution performing services for that institution).

Even these narrow existing exclusions are somewhat difficult to administer in practice, since, if only one person from an excluded class is included, even inadvertently, all employees from that classification must be permitted to make elective deferrals to the plan. Thus, as a practical matter, many plan sponsors choose to allow all employees the right to make elective deferrals upon date of hire.

As for employer contributions, eligibility restrictions, such as age and/or service requirements, may be imposed in a manner similar to that of qualified plans such as 401(k) plans, provided that such restrictions are not discriminatory in a manner that causes the plan to fail coverage testing under Code Section 401(a)(4). Historically, there were some differences as to how the nondiscrimination rules applied to 403(b) plans as opposed to 401(k) plans, but these differences were essentially eliminated by the final 403(b) regulations.

[Kevin C]

oldman, you are only quoting part of that reg section. There are other requirements listed.

1.403(b)-5(b)(2) Effective opportunity required. --For purposes of paragraph (b)(1) of this section, an employee is not treated as being permitted to have section 403(b) elective deferrals contributed on the employee's behalf unless the employee is provided an effective opportunity that satisfies the requirements of this paragraph (b)(2). Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections. A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election (as defined at §1.401(k)-1(a)(3)) between cash or a contribution to the plan. Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)-4© (including any permissible catch-up elective deferrals under §1.403(b)-4©(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees. An effective opportunity is not considered to exist if there are any other rights or benefits (other than rights or benefits listed in §1.401(k)-1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or indirectly) upon a participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract.

Consider a calendar year plan with quarterly entry. I'm hired on 10/18/2010 as a full time employee. The next quarterly entry date is 1/1/2011. If I am not allowed to defer until 1/1/2011, I do not have the opportunity to make a cash or deferred election for the 2010 plan year. And, I certainly do not have the right to defer up to the applicable limit for 2010. If this 403(b) gets an IRS audit, the plan sponsor will be in for an unpleasant surprise.

[austin3515]

I for one am frustratd that for a plan design that has been around for 30 years or so (i.e., 403b's), it is still unclear whether entry dates can be used.

That is insane.

[Peanut Butter Man]

Anyone know when the IRS plans on issuing the update to Rev. Proc. 2008-50? It is suppose to contain the provisions for correcting 403(b) plans.

[Kevin C]

The speaker for the IRS's phone forum on EPCRS on 8/24 said the updated Rev. Proc. is in the clearance process, but the system is backlogged. It may or may not be released this year.

He also said if you have a 403(b) failure, he suggests that if you know what the problem is and how to correct it, you should go ahead and fix it and not wait for the new Rev. Proc.