403(b) Basics: Universal Availability and the Final 403(b) Regulations
Universal availability is a plan concept unique to 403(b) plans. In a nutshell, universal availability means that if an employer permits one employee to defer salary into a 403(b) plan, then the employer must permit all employees to defer salary into the 403(b) plan. This concept is contained into Code §403(b)(1) as one of the 5 requirement which a 403(b) plan must meet to be considered a valid 403(b) plan.
As 403(b) plan guidance developed over the years, all employees came to mean something less than all employees. Notice 89-23 provided 4 significant categories of employees who could be excluded without violating the universal availability requirement – union employees, employees who made a one-time election to participate in a 414(d) plan, visiting professors, and employees affiliated with a religious order who had taken a vow of poverty. The Final 403(b) Regulations made significant changes to which employees can be excluded from 403(b) plans without violating the universal availability requirement, including eliminating the exclusions for these 4 groups of employees. While the Final 403(b) Regulations are generally effective January 1, 2009, the changes made to the exclusions from Notice 89-23 have their own effective dates which will be discussed toward the end of this article.
Code §403(b)(1) Nondiscrimination Requirement
Code §403(b)(1) contains 5 requirements which a 403(b) plan must meet for employees to exclude the contributions and other additions into the plan from their gross income for the taxable year to the extent that the aggregate of such contributions does not exceed the applicable Code §415 limit. Those 5 requirements are that the annuity contract is purchased:
A. for an employee by an employer described in Code §501(c)(3) which is exempt from tax under Code §501(a), for an employee who performs services for an educational organization described in §170(b)(1)(A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, or for the minister described in Code §414(e)(5)(A) by the minister or by an employer;
B. such annuity contract is not subject to Code §403(a);
C. the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums;
D. except in the case of a contract purchased by a church, such contract is purchased under a plan which meets the nondiscrimination requirements of Code §403(b)(12), and
E. in the case of a contract purchased under a salary reduction agreement, the contract meets the requirements of Code §401(a)(30).
It is the nondiscrimination requirement from Code §403(b)(1)(D) from which the universal availability requirement is derived. It is important to note that Code §403(b)(1)(D) specifically does not impose this nondiscrimination requirement on contracts purchased by a church.
Code §403(b)(12) Nondiscrimination Requirements
Code §403(b)(12) states that a plan meets the nondiscrimination requirements if:
1. for contributions other than elective deferrals, such as non-elective contributions or matching contributions, the plan must meet the requirements of Code §§401(a)(4), 401(a)(5), 401(a)(17), 401(a)(26), 401(m), and 410(b) in the same manner as other Code §401(a) plans. Contributions made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in the regulations are not treated as made pursuant to a salary reduction agreement for this purpose.
2. all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement. Plans are treated as if the plan includes all employees even if:
a. the plan excludes employees whose maximum Elective Deferrals would not exceed $200;
b. the plan excludes any employee who is a participant in an eligible deferred compensation plan (within the meaning of Code §457) or a qualified cash or deferred arrangement of the organization or another annuity contract described in Code §403(b)(12).
c. the plan excludes any nonresident alien described in Code §410(b)(3)(C).
Along with these three categories of employees who can be excluded from the plan without violating the universal availability requirement, other categories of employees can be subject to the conditions applicable under Code §410(b)(4). Those additional categories are:
d. employees who are students performing services described in Code §3121(b)(10), which are services performed by a student who is enrolled and regularly attending classes at such school, college, or university where the services are performed and the services are performed in the employ of a school, college, or university, or an organization described in Code §509(a)(3) if the organization is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of a school, college, or university and is operated, supervised, or controlled by or in connection with such school, college, or university, unless it is a school, college, or university of a State or a political subdivision thereof and the services performed in its employ by a student referred to in §218(c)(5) of the Social Security Act are covered under the agreement between the Commissioner of Social Security and such State entered into pursuant to §218 of such Act.
e. employees who normally work less than 20 hours per week.
In addition to these categories of employees which can be excluded from 403(b) plans, Notice 89-23 added additional categories of employees who could be excluded from the plan without violating the universal availability requirement. Since the exclusions provided by Notice 89-23 were not derived from the Internal Revenue Code, the Final 403(b) Regulations specifically addressed the Notice 89-23 exclusions by eliminating them.
Notice 89-23 Exclusions Eliminated by Final 403(b) Regs
The preamble to the Final 403(b) Regulations points out that Notice 89-23 had allowed excluding additional classes of employees even though such exclusions were not provided for in Code section 403(b)(12). Specifically, Notice 89-23 excluded:
1. employees who were covered by a collective bargaining agreement;
2. employees who made a one-time election to participate in a governmental plan described in Code §414(d), instead of a 403(b) plan;
3. professors who provide services on a temporary basis to another public school for up to one year and for whom §403(b) contributions are being made at a rate no greater than the rate each such professor would receive under the 403(b) plan of the original public school; and
4. employees who were affiliated with a religious order and who have taken a vow of poverty where the religious order provides for the support of such employees in their retirement.
The Final 403(b) Regulations specifically addressed excluding these 4 classes of employees by providing that these classes can no longer be excluded from making elective deferrals if the plan is to meet the universal availability requirement.
The preamble clarifies that while the Final 403(b) Regulations do not provide an exclusion from the universal availability requirement for individuals working under a vow of poverty, it is possible that they can still be excluded without violating the universal availability rule. For individuals working under a vow of poverty and who work for an institution that is controlled by the church organization and whose compensation from the employer is not treated as wages for purposes of income tax withholding under Rev. Rul. 68-123, they may be excluded from the plan without violating the universal availability requirement because they are not treated as employees of the entity maintaining the 403(b) plan.
The preamble also clarifies that visiting professors can be excluded without violating the universal availability requirement if the individual is rendering services to the university as a visiting professor, but continues to receive her compensation from her home university and elective deferrals on her behalf are made under the home university’s 403(b) plan. The preamble states that the final regulations do not, for purposes of Code §403(b) and in any case in which such treatment is appropriate, preclude the plan maintained by the home university from treating the visiting professor as an eligible employee of the home university.
Treas. Reg. 1.403(b)-5(b), Effective Opportunity and Roth Contributions
The Final 403(b) Regulations incorporate the universal availability requirement by specifically including it into Treasury Regulation 1.403(b)-5(b). It states that universal availability is required for section 403(b) elective deferrals. It also adds 2 additional provisions which a 403(b) plan must satisfy in order to meet the universal availability requirement. First, the employee’s right to make elective deferrals includes the right to designate 403(b) elective deferrals as designated Roth contributions. Second, at least once a year, the employer must provide employees with the effective opportunity to make elective deferrals. While the regulation states that whether employees have been provided with effective opportunity to make elective deferrals is a facts-and-circumstances test, such a determination will include evaluating the notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.
Treas. Reg. 1.403(b)-5(b)(4) provides that a plan does not fail the universal availability requirement if the plan excludes the following classes of employees. The classes are:
A. Employees who are eligible under another 403(b) plan, or are eligible under a 457(b) eligible governmental plan, of the employer which permits an amount to be contributed or deferred at the election of the employee;
B. Employees who are eligible to make a cash or deferred election, as defined in Treas. Reg. 1.403(k)-1(a)(3), under a 401(k) plan of the employer;
C. Employees who are non-resident aliens described in Code §410(b)(3)(C);
D. Subject to the conditions applicable under Code §410(b)(4), including Code §410(b)(4)(B) permitting separate testing for employees not meeting minimum age and service requirements, employees who are students performing services described in Code §3121(b)(10);
E. Subject to the conditions applicable under Code §410(b)(4), employees who normally work fewer than 20 hours per week, or such lower number of hours per week as may be set forth in the plan.
As discussed earlier, Treas. Reg. 1.403(b)-5(b) did not include any of the 4 classes of employees which had previously been permitted to be excluded by Notice 89-23. The IRS recognized that plans would need time to transition to the elimination of the Notice 89-23 exclusions, so the Final 403(b) Regulations provided additional transition time to remove those exclusions from plans.
Deadline for Transitioning from Notice 89-23 Exclusions
For plans which were utilizing the 4 exclusions from Notice 89-23, the Final 403(b) Regulations provide a transition period. While the Final 403(b) Regulations are generally applicable for taxable years beginning after December 31, 2008, a plan which, on July 1, 2007, was either:
1. excluding employees who made a one-time election to participate in a governmental plan described in Code §414(d) instead of a 403(b) plan;
2. professors who were providing services on a temporary basis to another school for up to one year and for whom Code §403(b) contributions are being made at a rate no greater than the rate each such professor who receive under the 403(b) plan of the original school; or
3. employees who are affiliated with a religious order and who have taken a vow of poverty where the religious order provides for the support of such employees in their retirement;
is permitted to continue that exclusion until taxable years beginning on or after January 1, 2010.
For a plan which is excluding employees covered by a collective bargaining agreement from eligibility to make elective deferrals on July 26, 2007, the plan is permitted to continue that exclusion until the later of:
(a) the first day of the taxable year that begins after December 31, 2008; or
(i) the date that such agreement terminates (determined without regard to any extension thereof after July 26, 2007) or
Since some governmental plans are sponsored by legislative bodies which meet in legislative sessions instead of annual sessions, such as Texas, there is one additional transition rule for those plans. If the plan is a governmental plan (as defined in Code §414(d)) for which the authority to amend the plan is held by a legislative body that meets in legislative session, the plan is permitted to continue the exclusion until the earlier of: (i) the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after January 1, 2009; or (ii) January 1, 2011.
© 2009 Qualified Pension Consulting Inc. All rights reserved. This article is published as a general informational resource and is general in nature. It is not intended to constitute legal advice. This article was originally published in the January 2009 edition of Qualified Pension Consulting Inc.'s 403(b) Insights newsletter.