Benefits Law Update

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The Universal Availability Rule Under Code Section 403(b)

One of the most well known, yet commonly flouted, requirements in the world of 403(b) plans is the "universal availability" requirement. Section 403(b) plans operate free of the nondiscrimination rules that apply to elective deferrals under 401(k) plans – namely the ADP test and minimum coverage rule – on the strength of the universal availability requirement. Under the universal availability requirement, found in Code Section 403(b)(12)(A), all employees must be permitted to defer at least $200 a year under the plan through salary reduction elections. The only employees who can be excluded from making salary reduction contributions under a 403(b) plan are: (1) employees who are participating in an "eligible" 457(b) plan, a 401(k) plan or another 403(b) plan maintained by the employer; (2) non-resident aliens; (3) work-study employees; and (4) "employees who normallywork less than 20 hours per week" (emphasis added). It's the last category that seems to generate the most trouble for employers.

Treasury regulations under Code Section 403(b) state that an employee normally works fewer than 20 hours per week if and only if: (1) the employer reasonably expects the employee to work fewer than 1,000 hours of service for the 12-month period beginning on the date of hire; and (2) for each 12-month period ending after the employee's first anniversary of employment, the employee actually did work fewer than 1,000 hours for the previous year.

Clearly, there is some linkage between the "normally work fewer than 20 hours per week" concept and the "reasonably expects the employee to work fewer than 1,000 hours" per year concept. In our view, they are intended to be two sides of the same coin as opposed to independent requirements. One way to look at it is that the second prong essentially creates a look back requirement as a check on the "reasonable expectations" of the employer. The regulations also refer to the general principles of Code Section 410, which imposes minimum coverage rules on qualified plans and, generally, discourages the exclusion of "part time, temporary or seasonal employees" simply by virtue of classification because often employees in those categories do end up working 1,000 or more hours a year.

We have encountered this issue frequently in counseling colleges and universities. Many colleges and universities exclude adjunct faculty members from their 403(b) plans. While it is somewhat risky to simply exclude adjunct faculty as a class of employees, a school should be able to exclude them without a problem if they "normally work fewer than 20 hours a week." But that may be easier said than done. In fact, an IRS employee plans specialist has said that one out of every seven college and university 403(b) plans audited by the IRS was found to have excluded adjunct faculty members without adequate recordkeeping to support the exclusion. See "Universal Availability" Compliance, 37 Pens. & Ben. Rep. (BNA) 1411 (June 22, 2010).

Adjunct faculty fall into a wide variety of demographic groups: young academics just trying to get some teaching experience, retired professors just wanting to stay in touch with the academic world, and successful professionals who are looking for another outlet for intellectual pursuits, to name a few. Some would like to save for retirement or shelter some income, while others have no interest in doing that (at least not through the school). More importantly for our purposes, the work schedules of adjunct professors are notoriously hard to predict. Some might teach all year long, others just teach for one semester. Some put in a lot of hours to prepare for class, others have taught the course so many times that they could do it in their sleep (so there isn't much preparation time outside class). That makes it very hard to keep track of their hours for purposes of applying either the "fewer than 20 hours per week" or the "1,000 hour look back" prong of the test (much less both of them). And even if the school applies an hours-based service equivalency, as permitted under DOL regulations (e.g., one hour per month resulting in the crediting of 190 hours of service for the month), it could get inconsistent results within adjunct faculty as group.

Bottom Line: if you are going to exclude employees of any type from making contributions to your 403(b) plan on the basis of hours worked, you must maintain a recordkeeping system that will support the exclusion (particularly if the excluded employee works in some capacity for a whole year).

Topics: Benefit Plans of Exempt Organization, Retirement Plans