Yesterday, I discussed the first of two big changes ahead for 403(b) plans that would make 403(b) plans resemble 401(k) plans, proposed IRS regulations that would be effective in 2008. Here is the second big change, the IRS Universal Availability Project. The IRS is sending out letters and questionnaires to public school districts regarding their 403(b) arrangements to determine their compliance with the Universal Availability requirement for 403(b) plans. The project was initially directed to districts in three states but has now been expanded to cover all 50 states and slated to last through 2008.

The Universal Availability requirement is similar to the eligibility requirement for 401(k) plans under which all eligible employees must be given the opportunity to make elective salary deferrals. The Director of the IRS Employee Plans division has indicated that the data collected so far has revealed "fairly widespread noncompliance by schools with the universal availability requirement for 403(b) plans."

Responding to the inquiry is voluntary, but the IRS has indicated that a failure to respond could lead to an IRS audit. If a school district’s plan does meet the requirement, it could result in loss of 403(b) tax-favored status, i.e., employee contributions to the 403(b) plan and earnings could be immediately subject to income tax. The IRS does, however, provide at least two methods of self-correction which are more favorable than using the other voluntary correction programs.

Regardless of whether school districts receive an IRS letter, all school districts should be concerned about whether they satisfy the Universal Availability requirement in their 403(b) plans and the proposed 403(b) regulations slated to be effective at the end of the year . Accordingly, it may be prudent for a school district to conduct an internal compliance review to determine the level of compliance of its plan… and to get ready for the regulations.