The Department of Labor’s (DOL) new “fiduciary rules” are scheduled to become effective April 1, 2017; however, the DOL is currently considering legal options regarding a possible delay in the applicability date of these new rules. Trustees should continue to monitor the status of these rules over the next few weeks in order to confirm that plans are fully complying once the rules do take effect.
Many other rules and regulations related to 403(b) plans have been in existence for a while, and some continue to provide challenges to these types of retirement plans.
One of the most common issues encountered by regulators when examining 403(b) retirement plans is the failure to follow the universal availability rule, a rule that is unique to 403(b) plans. The universal availability rule requires that all employees must be permitted to participate and make deferrals to an established 403(b) plan unless the employee falls into one of five permitted categories of exclusions.
Categories of employees that may be excluded are:
- Employees eligible to defer to another 401(k), 403(b) or 457(b) plan of the same employer
- Nonresident aliens
- Students performing services described in section 3121(b)(10) of the Internal Revenue Code
- Employees who normally work fewer than 20 hours per week
- Employees who contribute $200 or less annually
Certain categories of employees are specifically non-excludable. Those categories are:
- Employees who make a onetime election to participate in a governmental plan instead of a section 403(b) plan
- Union employees
- Visiting professors for up to one year under certain circumstances
- Employees affiliated with a religious order who have taken a vow of poverty
The categories noted above are simply a starting point when it comes to compliance. Several of these categories (for example, employees who work 20 hours per week) have additional factors which must be taken into consideration and evaluated on a routine and continuing basis.
It is important to note that the exclusions noted above relate only to a participant’s ability to defer and contribute to the plan. 403(b) plan sponsors do have a broader ability to exclude certain employees when it comes to an employer matching contributions or other employer contributions to the plan.
The IRS Employee Plans Compliance Unit (EPCU) is tasked with performing data analysis on employee benefit plans in order to focus on areas of potential non-compliance. In recent years, the EPCU has undertaken several compliance projects related to 403(b) plans. Two of these projects related to the concept of universal availability and looked specifically at K-12 public schools and higher education institutions. During a 2016 webcast, the EPCU noted that most common universal availability errors seen during these examinations included:
- Plan language not properly stated for purposes of determining that employees can participate
- Scriveners' errors in adapting new plan documents; not properly monitoring hours of service for those who normally work less than 20 hours per week or 1,000 hours in the applicable 12-month period
- Improperly excluded employees who are not eligible for other benefits
- Using a classification of employees such as temporary, per-diem, graduate student, adjunct professors, janitor or bus driver, and then not keeping track of their hours worked
- Failure to provide effective opportunity notice to participate or lack of notice to part-time employees
- Not allowing eligible employees to defer timely
- Not following plan terms for eligibility and universal availability
A common problem is that some plan sponsors have been excluding employees based on their classification rather than the number of hours they worked per year. As a result of excluding based on classification, employers were not keeping track of the hours worked by these employees leading to the failure to properly notify an employee if that employee became eligible to participate in the plan.
To avoid these types of issues, it is recommended that those charged with governance and oversight of a 403(b) plan monitor the plan and perform procedures annually to make sure that it is in compliance with the universal availability rule. An effective way to do this is to use a reasonable method of tracking the number of hours worked by an employee, documenting and monitoring the hours worked so it is known if the employees are eligible or not.
Another way to ensure that all employees have been notified of their option to participate is to look at the various categories of employees (i.e. substitute and part-time teachers, janitors, maintenance workers, bus drivers) and see if there is a particular group with lower participation rates than others. If so, this may indicate that there might be some communication issues, and it may prove beneficial to confirm with these individuals that they are aware of their ability to participate in the plan.
If a plan sponsor determines that it has violated the universal availability rule, there are several steps that can be taken to rectify the operational error. First, the employee that was erroneously excluded from the plan must be allowed to participate in the plan. Further, the plan sponsor may be required to make a corrective contribution for the period of time that the employee was excluded from the plan.
Revenue Procedure 2013-12 Appendix A.05(6) allows employers to deem the lost salary deferral amount to be the greater of:
- 3% of compensation, or
- The maximum deferral percentage for which the plan sponsor provides a matching contribution rate at least as favorable as 100% of the elective deferral made by the employee
Most of the universal availability errors can be fixed through the IRS’ Employee Plans Compliance Resolution System (EPCRS). Any operational error noted by plan trustees is an important issue that needs to be addressed, as failure to comply with the plan document or the tax rules governing retirement plans (including the universal availability rule) can put a plan at risk of losing its tax deferred status.
As noted, the rules surrounding the administration of 403(b) plans can be complicated. If you have questions or would like additional information, please contact one of RubinBrown’s Not-For-Profit or Employee Benefit Plan Audit Services professionals for further guidance.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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