Part-time employees who normally work less than 20 hours per week may be excluded from making elective deferrals based on an exception to the universal availability requirement for 403(b) plans. However, under the once-in-always-in (OIAI) condition, 403(b) regulations provide once an employee meets the part-time exclusion conditions, whether in his or her initial year of employment or for any later exclusion year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion.
Due to the concern that employers were unaware of the OIAI condition, commenters requested transition relief, which has been provided under IRS Notice 2018-95 (Notice). Under this Notice, the IRS is offering relief from the OIAI condition for a transition period known as the Relief Period. The Relief Period begins with taxable years beginning after Dec. 21, 2008, and ending for all employees on the last day of the last exclusion year that ends before Dec. 31, 2019. An exclusion year is defined as either any plan year that ends after an employee’s first year of employment or each subsequent 12-month anniversary period after an employee’s first year of employment. This is defined in the plan document.
For most calendar-year plans, the Relief Period ended Dec. 31, 2018. We’ve contacted the IRS to determine if expanded relief will be available, given the Notice was issued less than 30 days before the end of the Relief Period for calendar-year plans, but have not received confirmation. Absent additional guidance, calendar-year plan sponsors should assume the Relief Period ended Dec. 31, 2018.
Transition relief from the OIAI conditions include:
- Relief regarding plan operations for the Relief Period: During the Relief Period, Section 403(b) plans won’t be treated as failing the part-time exclusion because the plan wasn’t operated in compliance with the OIAI condition exclusions. However, employers must have correctly administered first-year and preceding-year exclusion conditions and properly applied the consistency requirement.
For example, an employee was hired in 2012 and wasn’t expected to work 1,000 hours during the first 12 months of employment. The employee actually worked 1,000 hours in 2012, 500 hours in 2013 and 2014, and 1,000 hours in 2015. The employer applied the first-year and preceding-year exclusion conditions and allowed the employee to make elective deferrals in 2013 and 2016.
The employee was improperly excluded from making elective deferrals in 2014 and 2015. The plan isn’t treated as violating the OIAI condition provided it meets the requirements of the Notice.
- Relief regarding plan language: Individually designed 403(b) plans have until March 31, 2020, to correct form defects in the plan. If the operational relief described in the Notice applies, the employer may amend plan language to reflect that the OIAI exclusion condition wasn’t applied for all exclusion years, and that the amendment is treated as a correction of the form defect. Note, plan language that tracks regulatory language of the part-time exclusion without explicitly highlighting the OIAI exclusion conditions is treated as language that reflects the OIAI exclusion condition wasn’t applied, and the plan must be amended. Pre-approved 403(b) plans should already contain the applicable language.
- Fresh-start opportunity: Under the fresh-start opportunity, a 403(b) plan won’t be treated as failing to satisfy the conditions of the part-time exclusion if the OIAI exclusion condition is applied as if it first became effective Jan. 1, 2018.
For example, an employee was hired in 2017 and was expected to work 1,000 hours during the first 12 months of employment. The employee actually worked 500 hours in 2017 and 2018. The employer applied the first-year and preceding-year exclusion conditions and allowed the employee to make elective deferrals in 2017, but not in 2018 or 2019. Under the fresh-start opportunity, the OIAI exclusion condition is applied as if it was effective Jan.1, 2018. Since the employee was hired before 2018, the employer can disregard that the first-year exclusion condition wasn’t met and exclude the employee from making elective deferrals in 2019.
What you can do now
- Sponsors of 403(b) plans should review their processes to determine if the OIAI exclusion condition has been properly applied. If it hasn’t been such in past plan years, employers will need to establish new processes in order to comply with the universal availability rules after the Relief Period ends. Plan sponsors with calendar-year plans should take action as soon as possible.
Sponsors of 403(b) plans should review their processes to determine if the OIAI exclusion condition has been properly applied.
- Employers with an individually designed plan may need to amend the plan to reflect that the OIAI exclusion condition wasn’t applied for all years. Amendments must be made by March 31, 2020.
If you have questions or need help assessing your client’s 403(b) plan and the application of the OIAI condition, contact our employee benefit experts today.