The IRS has provided transition relief (Notice 2018-95) from the “once-in-always-in” (OIAI) condition for excluding part-time employees from making elective deferrals under a Section 403(b) plan.
Under the relief, a Section 403(b) plan will not be treated as failing to satisfy the conditions of the part-time exclusion solely because the plan did not comply with the OIAI condition during a prescribed transition relief period. The Notice also provides relief regarding plan language and a fresh-start opportunity after the relief period ends.
Under the universal availability nondiscrimination requirements of Section 403(b)(12)(A), employers maintaining a Section 403(b) plan are generally required to permit all employees to make elective deferrals if any employee of the employer is permitted to make elective deferrals. However, certain categories of employees may be excluded from this requirement, including part-time employees who normally work less than 20 hours per week (the “part-time exclusion”). The part-time exclusion provides three separate conditions that allows employees to be excluded from making elective deferrals:
- “First-year” exclusion condition: The employer must reasonably expect the employee to work fewer than 1,000 hours during the employee’s first year of employment.
- “Preceding-year” exclusion condition: After the first year of employment, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period.
- The OIAI exclusion condition: The employee may be excluded under the part-time exclusion if and only if, in the employee’s first year of the employment, the first-year exclusion is met, and, in each exclusion year ending after the first year of employment, the preceding-year exclusion is met.
The effect of the OIAI exclusion condition is that once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis of the employee being a part-time employee. The transition relief is being provided by the IRS because many Section 403(b) plan sponsors were not aware that the part-time exclusion included the OIAI exclusion condition, which was originally included in the final Section 403(b) regulations issued in 2007 and first applicable to years beginning after 2008.
The relief period begins with taxable years beginning after Dec. 31, 2008. For plans with exclusion years based on plan years, the relief period ends for all employees on the last day of the last exclusion year ending before Dec. 31, 2019. For plan years with exclusion years based on employee anniversary years, the relief period ends on the last day of the employee’s last exclusion year ending before Dec. 31, 2019.
For purposes of Notice 2018-95, an exclusion year is either (1) any plan year that ends after an employee’s first year of employment, or (2) if a plan so provides, each subsequent 12-month period (“employee anniversary year”) after an employee’s first year of employment.
In general, for exclusion years beginning on or after Jan. 1, 2019, a plan that provides for the part-time exclusion must apply the OIAI exclusion condition in both form and operation. However, the Notice also provides a fresh-start opportunity under which a plan will not be treated as failing to satisfy the conditions of the part-time exclusion for periods after the relief period, if the OIAI exclusion condition is applied as if the OIAI exclusion condition first became effective Jan. 1, 2018. Thus, some Section 403(b) plans that provide for the part-time exclusion may need to change their plan operations beginning in 2019 and may need to adopt plan amendments on or before March 31, 2020 (in accordance with the plan amendment relief) to take advantage of the transition relief provided by Notice 2018-95.
Partner, Washington National Tax Office
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