403(b) Outlook: Universal Availability for Salary Reduction Plans

February 26, 2008

403b Outlook Archive 403(b) Outlook Archive

What is the rule? You need to provide all employees with the opportunity to make elective deferrals of $200 or more to your organization’s salary reduction 403(b) plan.

According to the final 403(b) regulations (Section 1.403(b)-5(b)), you may exclude only:

  • Employees who are eligible to participate in a governmental 457(b) plan
  • Employees who are eligible to participate in their employer’s 401(k) plan or another 403(b) plan
  • Non-resident aliens
  • Certain student employees
  • Employees who normally work fewer than 20 hours per week (new definition applies)
  • Employees who have taken a vow of poverty and whose compensation is not subject to income tax withholding
  • Visiting professors paid by their home university whose elective deferrals are made to the home university’s 403(b) plan

Stricter administrative requirements

Plan administrators will also be responsible for:

  • Notifying all eligible employees (including previously excluded employees) of their right to participate in the plan
  • Monitoring the hours of all employees who normally work fewer than 20 hours each week

What has changed?

Under repealed IRS Notice 89-23, you were also able to exclude:

  • Union employees
  • Certain visiting professors (not described above) for up to one year
  • Individuals who have taken a vow of poverty, are affiliated with a religious order and whose religious order provides for their retirement
  • Employees who make a onetime election to participate in a governmental non-403(b) plan instead of a 403(b) plan

You can no longer exclude these categories of employees.

The effective date for the final 403(b) regulations is generally Jan. 1, 2009. Delayed effective dates apply if the plan previously included categories of employees who are now excluded:

  • Jan. 1, 2010 for visiting professors, employees who make a one-time election and individuals who have taken a vow of poverty as described above
  • The exclusion for union employees can continue until the later of:
    • Jan. 1, 2009, or the earlier of:
      • The date the collective bargaining agreement terminates, or
      • July 26, 2010
    • For governmental 403(b) plans where the legislature must amend the plan, the exclusion can continue until the earlier of:
      • the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after Jan. 1, 2009, or
      • Jan. 1, 2011

What happens if you fail to comply? Your salary reduction plan may be disqualified and all contracts for all employees in this plan may become taxable and included in the employee’s gross income. Please review your plan’s eligibility requirements and enrollment procedures.

Read more about the final 403(b) regulations.

Next week’s article: Additional changes required by the repeal of IRS Notice 89-23.


© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017