Annual Service Requirement for Mandatory Employee Contributions?

Does the “once in, always in” concept applicable to eligibility for elective deferrals also apply to eligibility for employer contributions, and if so, what is the legal authority requiring such treatment?

By way of background, we have a client that is a school (the “School”) that sponsors a 403(b) plan (the “Plan”). To comply with the universal availability and LTPT rules, the Plan provides that all employees are eligible to participate in the Plan for purposes of elective deferrals upon hire.

The Plan also provides for (1) mandatory employee contributions and (2) nonelective employer contributions to all participants who make mandatory employee contributions. From a cultural and employee relations standpoint, it is important for the School to continue to offer mandatory employee contributions and to provide nonelective contributions to all participants who make mandatory employee contributions. However, the School would like to impose an annual service requirement on mandatory employee contributions and associated nonelective contributions so that only participants who work 1,000+ hours in a year receive such contributions for that year.

This annual service requirement on employer contributions is important for the School because the School employs many individuals on a temporary/seasonal basis (coaches, summer camp counselors, substitute teachers, tutors, etc.), has many former full-time employees return to work with the School in temporary/seasonal positions, and has high rates of employee turnover. It would be extremely administratively burdensome for the School to make employer contributions every year to all employees who once worked 1,000+ hours in a plan year and who now work less than 1,000 hours/year.

Because we cannot use an allocation condition to impose an annual service requirement on mandatory employee contributions, we’re trying to find a way to impose an annual service requirement on these employer contributions through eligibility. However, we’ve received pushback from the School’s consultant and recordkeeper that the “once in, always in” concept applicable to elective deferrals also applies to employer contributions. While it’s clear that the “once in, always in” requirement of the universal availability and LTPT rules do not apply to employer contributions, we cannot find conclusive guidance as to whether or not Code section 410(a) imposes a “once in, always in” requirement on employer contributions.

Maybe as a 403(b) plan the rules are different, but what this looks like to me is that the "mandatory" employee contribution is the amount required to get the employer contribution - say if you contribute 2% or whatever the specific mandatory % then you get 8% from the employer. Anything above or below the 2% or whatever % is "voluntary". In my opinion, that make the employer contribution a match not a non-elective contribution, and subject to ACP testing, as it is contingent upon an employee salary deferral ofX%. In regard to your question, I believe they can have a 1000-hour annual requirement to receive the match (assuming that passes 410(b) coverage testing) but could not (and really need not) have such for what you/they call the mandatory piece.

I have seen similar type designs in tax-exempts companies and colleges and the employer contribution is a match, with the exception being the situation where the mandatory contribution is truly that and a condition of employment, and is therefore not considered an employee deferral and so the resulting employer contribution is not considered a match.

If I'm off base because school district 403(b)s are different then I defer to our experts out there who work on these plans, as I do not.