The IRS Is Reviewing 403(b) Plans: The Universal Availability Eligibility Requirement Is a Focus
School Advisor, 2007 Issue No. 2   

The Internal Revenue Service has recently completed a variety of compliance checks for 403(b) plans maintained by school districts. This test focuses on the eligibility requirements for participation in the 403(b) plan. School districts may not prohibit any employees or employee groups from participating in its 403(b) plan, with limited exception. Generally, the employees that may be excluded are employees who participate in an eligible Section 457 plan, are covered by a collective bargaining agreement, are student employees, or regularly work less than 20 hours per week. Public school districts in Washington, Missouri, and New Jersey have been targeted with questionnaires from the IRS to determine if any violations of the universal availability requirement exist. It has been suggested that this initiative may expand to other states as well.

Upon discovery of violations of the universal eligibility requirement (i.e., employee groups that do not meet the exceptions to the rule being excluded from participating in the plan), corrections are required. The district must make a fully vested contribution on behalf of those employees who were erroneously excluded from participating in the plan to compensate employees for the lost opportunity to participate in the plan. The IRS offers guidance on acceptable calculations for these corrective contributions. We encourage you to contact us for assistance if you receive any IRS inquiries regarding these matters.