403(b) Plan Transition Relief for Elective Deferral “Once in, Always in” Rule

The IRS has released Notice 2018-95, which provides transition period relief from the “once in always in” (OIAI) condition for excluding part-time employees (i.e., employees who normally work fewer than 20 hours a week) from making elective deferrals under a 403(b) plan.

The 403(b) plan exclusion rules found under Treasury Regulation 1.403(b)-5(b)(4) state, in part, that an employee may be excluded if the employee is reasonably expected to work less than 1,000 hours in the employee’s first year of employment. For subsequent years, the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period. Most crucial is the OIAI rule, which states that once a participant does not meet the conditions for exclusion as previously stated, the employee may no longer be excluded under the part-time exclusion. That is, once eligible to defer, an employee cannot lose this eligibility due to the part-time exclusion, even if he works less than 1,000 hours in a preceding 12-month period.

In Notice 2018-95, the IRS provides transition period relief for 403(b) plans that have not followed the OIAI rule (i.e., have been excluding participants as part-time after they became eligible).

The relief stems from comments related to the pre-approved 403(b) plan Listing of Required Modifications (LRMs). The LRMs address the OIAI rule, stating that “once an Employee becomes eligible to have Elective Deferrals made on his or her behalf under the Plan…the Employee cannot be excluded from eligibility…in any later year under this standard.” Commenters requested transition relief based on this LRMs language, claiming that many employers were not aware that the OIAI rule existed.

The notice provides relief for taxable years beginning after December 31, 2008, and ending on the last day of the last exclusion year that ends before December 31, 2019. During this period, plans will not be treated as failing to satisfy the conditions of the part-time exclusion merely because the plan was not operated in compliance with the OIAI rule. The notice goes on to provide examples, and also establishes a “fresh start” opportunity for plans once the relief period expires, requiring plans to follow the OIAI rule for exclusion years beginning on or after January 1, 2019.