403(b) Plans Must Comply with the “Once In, Always In” Rule This Year
Tax-exempt employers whose 403(b) plans have failed to comply with the "once in, always in" eligibility rule in the past should be well on their way to compliance by now. IRS Notice 2018-95 granted limited relief from this common administrative failure. The grace period for non-compliance has ended for many, perhaps most, 403(b) plans, but all 403(b) plan sponsors should ensure that they are in compliance this year. Specifically, this means that all employees that worked at least 1,000 hours in 2018 should be permitted to make elective deferrals in 2019. In addition, tax-exempt employers maintaining individually designed plans that failed to comply with the "once in, always in" rule in the past, must adopt plan amendments by March 31, 2020, to state that the "once in, always in" rule was not applied.
The timing of the relief period is different for plans that use a plan year other than the calendar year or that measure eligibility based on the anniversary of an employee's date of hire. The rules for these plans are explained below.
Once In, Always In for Elective Deferrals
Most 403(b) plan sponsors are familiar with the "universal availability" rule of Code Section 403(b)(12)(A): in general, if any employee is permitted to make elective deferrals to an employer's 403(b) plan, every employee must be able to make deferrals to the plan. There are a few exceptions to this requirement. Foremost among them, employees that "normally work" less than 20 hours per week may be excluded from the plan. Treasury Regulations Section 1.403(b)-5(b) explains how to determine whether an employee "normally" works less than 20 hours per week.
For new employees, eligibility must be based on the number of hours the plan sponsor reasonably anticipates the employee will actually work over the employee's first year. In subsequent years, eligibility is based on the number of hours the employee actually worked in the previous year. If, in any year, an employee works at least 1,000 hours, the employee must be permitted to participate in the 403(b) plan the next year.
In addition, the regulations provide that once an employee works 1,000 or more hours in a plan year, and therefore becomes eligible to participate in the plan, the employee must remain eligible to make elective deferrals under the plan in future years, regardless of how many (or how few) hours the employee works. This is known as the "once in, always in" rule, and the IRS has found that many employers have failed to comply with this rule.
Temporary Relief from Violations
Last year, the IRS granted relief from violations of the "once in, always in" rule. IRS Notice 2018-95, announced that a 403(b) plan would not be treated as violating the universal availability requirement simply because the plan did not follow the rule.
During the relief period, plans are treated as compliant if all of the following are true:
- The plan contains an express exclusion of employees who work less than 20 hours per week;
- The plan administrator applied the first year exclusion rule correctly;
- The plan administrator applied the look back exclusion rule correctly for subsequent plan years;
- No employees working part-time hours received different or special treatment; and
- The only mistake is that the plan had part-time employees coming in and out of participation based on the number of hours they worked each year.
Essentially, the plan must have been operated in a compliant manner with regard to part-time employees in all respects except application of the "once in, always in" rule.
To obtain relief, individually designed plans must be amended before March 31, 2020, to state that the "once in, always in" rule was not applied. Pre-approved plans do not need to be amended.
The relief period begins with plan years beginning after December 31, 2008. For calendar year plans, this means the plan year beginning January 1, 2009 – the effective date of the 403(b) regulations that contain the "once in, always in" rule.
When the relief period ends depends on how the plan measures eligibility. For plans that measure an employee's hours of service for eligibility based on the plan year, the relief period lasts until the last day of the plan year ending before December 31, 2019. For calendar year plans, this means that the relief ended December 31, 2018. For plans that measure an employee's hours of service for eligibility based on the anniversary of the employee's date of hire, the relief period ends for a given employee on the employee's last anniversary date before December 31, 2019.
Regardless of when the relief ends or ended for a given 403(b) plan, all plans should be complying with the "once in, always in" rule beginning this year. The IRS has simplified the process of coming into compliance somewhat, by permitting plans that have previously failed to comply with the "once in, always in" rule to make a fresh start. Specifically, beginning with plan years that start on or after January 1, 2019, plan administrators may treat the "once in, always in" rule as if it became effective on January 1, 2018.
This means that plans that have excluded part-time employees may use an employee's hours of service in 2018 to determine whether the employee is eligible to participate in the plan in 2019, and exclude employees that worked less than 1,000 hours, even if the employee was allowed to participate in some previous year. Then, going forward, the employee may be excluded every year unless the employee worked at least 1,000 hours in the previous year, at which point the employee must be allowed to participate in all subsequent years.
For non-calendar year 403(b) plans, eligibility for the plan year beginning in 2019 should be determined based on hours worked in the previous plan year. And for plans that measure eligibility based on the anniversary of an employee's date of hire, eligibility for an employee for the year beginning in 2019 should be determined based on hours worked in the previous year. For both types of plans, if an employee worked at least 1,000 hours in the previous year, then the employee must be allowed to participate for every year going forward.
Sponsors of 403(b) plans should review their plan operations in light of these rules. If the plan has been compliant in its treatment of part-time employees, except for failure to adhere to the "once in, always in" rule, the sponsor can rest easy knowing that it will not face consequences for that past failure. But no matter what, the plan must be operated in compliance with the "once in, always in" rule in 2019 and going forward. And sponsors of individually designed plans that have not complied with the "once in, always in" rule must adopt the required plan amendment by March 31, 2020 in order to take advantage of the relief provided by Notice 2018-95.