Unique to 403(b) Plans: Universal Availability
By Anna Noble, QKA, CIP
What does the universal availability requirement in 403(b) plans mean?
The universal availability requirement is contained in Internal Revenue Code Section (IRC Sec.) 403(b)(12)(A)(ii). This section states that the plan will meet nondiscrimination requirements if all employees willing to defer at least $200 annually into the plan are allowed to participate in the salary reduction program. In other words, an employer cannot impose any age or service requirements before employees are able to contribute elective deferrals into a 403(b) plan, as long as an employee intends to defer at least $200 annually.
Does the universal availability rule apply to all organizations?
Only certain types of entities may offer 403(b) plans: public education institutions and certain governmental employers, and 501(c)(3) organizations. The only employers that are exempt from the universal availability rule are “steeple” churches and qualified church controlled organizations (QCCOs).
How does the employer satisfy the universal availability requirement?
First, the employer needs to ensure that it is notifying employees at least once each year of their ability to participate in the plan, or to make changes to their deferral election.
Second, the 403(b) plan may be designed to exclude certain groups of employees.
Employees who are eligible to participate in another elective deferral plan or 457(b) governmental plan sponsored by the employer
Nonresident aliens with no U.S. source income
Students performing services described in IRC Sec. 3121(b)(10)
Employees who normally work less than 20 hours per week
How does the employer determine if an employee is part of the group of employees who normally work less than 20 hours per week?
The employer may exclude an employee under this rule if it reasonably expects them to work less than 1,000 hours per year. Employees who complete 1,000 hours of service during their initial 12 months of employment or during any plan year thereafter, must be allowed to participate in the plan. Once employees becomes eligible to participate in the plan, they cannot be excluded, regardless of the number of hours of service they perform in the later years.
What type of nondiscrimination testing are the elective deferrals in a 403(b) plan subject to?
Because of the universal availability rule, the elective deferral contributions in 403(b) plans are not subject to any nondiscrimination testing, unlike elective deferral contributions in 401(k) plans, which are subject to the actual deferral percentage (ADP) test. This is one of the advantages that 403(b) plans have over 401(k) plans.
