This is the fourth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, wrote about Terminating Tax Deferred Annuity Plans.

Now it’s my turn, and today’s post is about the Change in 403(b) Universal Availability.

The rules have changed for those employers who have excluded certain classes of employees from making elective deferrals to their 403(b) plans. Those employers now must check their plans before January 1, 2009 to make sure they are excluding properly.

Technically, the regs changed the Universal Availability rules. These are the rules that an employer must follow to determine which employees can and cannot be excluded from making elective deferrals to a 403(b) plan. Note that employer contributions are still subject to the discrimination rules under Section 401(m) and 401(a)4 of the Internal Revenue Code.

The current IRS interpretation of the Universal Availability rules go all the way back to Notice 89-23, issued by the IRS in 1989. That Notice permitted the following classes of employees to be excluded:

  • Nonresident aliens with no US source income
  • Employees eligible to defer to a 401(k) or 457(b) plan of the same employer
  • Employees who will not make at least a $200 deferral per year
  • Employees who are expected to work less than 20 hours per week
  • Students performing services under a work-study program,
  • Employees whose normal work week is less than 20 hours
  • Employees covered by a collective bargaining agreement
  • Visiting professors
  • Individuals who make a one-time election to participate in a governmental plan
  • Certain employees affiliated with a religious order who take a vow of poverty

The final regulations revoked several of the previous exclusions that were provided in Notice 89-23. The following four groups can no longer be excluded from making salary deferrals:

  • Employees covered by a collective bargaining agreement.
  • Visiting professors
  • Individuals who make a one-time election to participate in a governmental plan
  • Certain employees affiliated with a religious order who take a vow of poverty.

The final regulations also require that all eligible employees be given an “effective opportunity” to participate in the plan. This means that on an annual basis, employers should not only review their new employees to determine compliance with the Universal Availability rules, but are also required to provide to their employees another “effective opportunity” to participate notice.

It’s a little more complicated than that in practice so here are a few suggestions to help meet the new compliance requirements:

  1. Make sure the plan document has the new exclusion rules.
  2. Identify all employees eligible to participate.
  3. Provide employees with a written notice when they are hired and at least once a year about their eligibility to participate.
  4. Conduct employee educational sessions that review the plan provisions and available investment options.

That’s it for now. Bob will be back on Monday with 403(b) Service Agreements: “Harmonizing” the 403(b) Plan. Have a happy and safe Thanksgiving holiday,