This month, the IRS issued Notice 2018-95, clarifying certain eligibility rules and granting relief to employers that may have been incorrectly reading the rule.
For 403(b) plans, there is a universal availability rule that requires the plan be offered to all employees. However, there are exceptions to this rule, one of which is the ability to exclude part-time employees who work less than 20 hours per week, as well as work less than 1000 hours in a year.
This rule is often interpreted to mean that employers who have part-time employees participating in the plan because they worked 1,000 hours are later able to stop deferrals if the employee does not work 1,000 hours in a subsequent plan year. However, the IRS released language in the past that made it clear that they do not interpret the rule this way. Instead, the IRS recognizes the “once in, always in” rule that mandates that once an employee gains eligibility, they cannot lose it later, even if they work less than 1,000 hours.
Under the Notice, the IRS grants relief to employers who may have misinterpreted the rule. As long as employers correct the administration of this eligibility rule by January 1, 2019, they will not be held accountable for failing to comply with the universal availability rule for years preceding 2018.
If you think you may have improperly excluded part-time employees, please contact your account representative at Nyhart for more information. As always, please contact us if you have any questions.