IRS Logo
Print - Click this link to Print this page

Employee Plans Compliance Unit (EPCU) - Completed Projects with Summary Reports - 403(b) Universal Availability Higher Education

Summary Report

Beginning in June 2011, the Internal Revenue Service (IRS) Employee Plans Compliance Unit (EPCU) began a project to determine whether Higher Education Institutions are in compliance with the Universal Availability (UA) non-discrimination rules described in Internal Revenue Code (IRC) section 403(b), the new plan document requirements, and the use of administrative exclusions as described in Notice 89-23.

The sample for this project included private and public higher education institutions by enrollment size (small, medium, large). The purpose of the project was to educate plan sponsors on aspects of UA that higher education organizations may not understand, and to provide information regarding compliance with the new plan document requirements.

Results

About 40% of the respondents reported one or more issues with possible future impact. The area with the largest possible future impact is the communication of the opportunity to begin regular elective deferrals, 48% of the entities did so only once at hire. In addition, only 30% communicated the opportunity to change regular elective deferrals only once at hire.

Of the 12% offering residency programs, only 1 entity did not consider residents eligible for 403(b) elective deferrals.

The data showed that 18% of the entities excluded faculty employees from electing 403(b) salary deferrals. The faculty group excluded the most often was “Student assistants” (10%; most identified as performing services described in IRC 3121(b)(10)). The next largest exclusion involved “Adjunct instructors” (6%) and “Adjunct lecturers” (4%). While some of these exclusions appear to be valid, others would require more information to determine the validity.

The data showed that over 80% of the entities had written plan documents describing the material terms of their 403(b) plans. The requirement to have such a plan document went into effect in 2009. Very few respondents met this requirement prior to 2009, but a majority adopted the plan documents in 2009. Over 70% of the entities indicated that their plan document excluded certain employee groups.

The areas most noted as needing attention from the 403(b) community include:

  1. Plans with “conditioned eligibility”, which is not allowed
  2. Review the required hours of service for eligibility (20 hours per week/1,000 per year)
  3. The importance of having an up to date plan document
  4. Emphasizing the annual communication requirement to begin or change regular 403(b) and Roth 403(b) elective deferrals
  5. Discuss the importance of communicating and describing the terms of eligibility to participants.

A breakdown of responses by plan size revealed that the larger plans had the fewest number of issues, although the issues found in large plans also existed in the medium and small plans.

Large Plans

Large plans reported the fewest areas of concern, though the areas identified affect all plan participants. Further review of Large Public and Large Private plans is recommended in the following areas:

  1. Conditioned eligibility
  2. Hours of service for eligibility
  3. Minimum salary deferral requirements
  4. The importance of an updated plan document
  5. Timely adoption of a written plan document

Medium Plans

Medium plans reported issues affecting all plan participants, as well as apparent non-compliance in the area of specific employee group exclusions. Further review of Medium Public and Medium Private plans is recommended in the following areas:

  1. Communication of opportunity to begin or change regular 403(b) and Roth 403(b) deferrals
  2. Conditioned eligibility
  3. Exclusion of part-time employees (administrative and support staff employee groups)
  4. Exclusion of student assistants (administrative and support staff employee groups)
  5. Exclusion of teaching fellows and student assistants (faculty employee groups) (specifically Medium Private plans)
  6. Hours of service for eligibility
  7. Minimum salary deferral requirements
  8. Resident eligibility for deferrals (specifically Medium Public plans)
  9. The importance of an updated plan document
  10. Timely adoption of written plan document

Small Plans

Small Plans reported the highest number of possible areas of concern for issues affecting all plan participants and specific employee groups. Further review of Small Private and Small Public plans is recommended in the following areas:

  1. Communication of opportunity to begin or change regular 403(b) and Roth 403(b) deferrals
  2. Conditioned eligibility
  3. Exclusion of adjunct instructors, adjunct lecturers, adjunct professors, student assistants, and teaching fellows (faculty employee groups)
  4. Exclusion of part-time employees (administrative and support staff employee groups)
  5. Exclusion of part-time employees and visiting professors (faculty employee groups) (specifically Small Private plans)
  6. Exclusion of student assistants (administrative and support staff employee groups) (specifically Small Private plans)
  7. Hours of service for eligibility (specifically Small Public plans)
  8. Minimum salary deferral requirements (specifically Small Private plans)
  9. The importance of an updated plan document
  10. Timely adoption of written plan document

It is important that plan sponsors review their plan administrative procedures and plan document regularly to ensure both are in compliance with the regulations set forth.

Background

This Project focused on the requirements in the final 403(b) regulations involving UA, the written plan document, and those higher education organizations that continue to use the administrative exclusions under Notice 89-23. The effective opportunity to make (or change) a cash or deferred election at least once during each plan year and the anti-conditioning rules (no other benefit or right can be conditioned upon a participant making or failing to make a contribution to the section 403(b) plan) are being reviewed. EP is concerned about the group of employees who worked more than 1,000 hours of service during the prior 12-month period beginning with their date of hire (or anniversary thereof), but who were not provided with an effective opportunity to make elective deferrals. Our focus is to educate and help sponsors understand their responsibilities regarding their section 403(b) tax sheltered annuity plans relating to these legal areas.

Contacts were sent to a random sample of 336 entities, to measure their compliance levels. The responses received indicated that over 80% of the entities offered employees an opportunity to enter into a salary reduction agreement, while almost 25% allowed after-tax Roth elective deferrals. Entities’ eligibility requirements to make regular deferrals differed from eligibility requirements for after-tax Roth deferrals in less than 1% of the responses received.

Page Last Reviewed or Updated: 14-Nov-2016