United States: Tax-Exempt Employers: IRS Issues Relief From Confusing 403(b) Eligibility Requirement Applicable To Part-Time Employees

Last Updated: December 12 2018
Article by Richard G. Schwartz

On December 4, 2018, the Internal Revenue Service issued Notice 2018-95 (the "Notice"), which clarifies the application of the Internal Revenue Code (the "Code") Section 403(b) plan "universal availability" rule to part-time employees normally working fewer than 20 hours a week. The IRS established relief for 403(b) plans that have not properly applied the universal availability rule to such part-time workers any time after 2008 and before 2019. The need for this rule highlights an important distinction between 403(b) plans and 401(k) plans, relieves 403(b) plans from liability (to the IRS) for prior failures to have properly covered part-time workers, and allows for a "fresh-start" following the end of the relief period.

403(b) Plans and the Universal Availability Requirement

In offering employees an individual account-type tax-preferred retirement plan, tax-exempt employers have the option to establish either a 401(k) plan or a 403(b) plan.1 One important distinction between 401(k) plans and 403(b) plans is how the two types of plans are tested for nondiscrimination with respect to employee salary deferral contributions. 401(k) plans are subject to the "average deferral percentage" (or "ADP") test, while 403(b) plans are not. A consequence of an ADP test failure can be having to return employee salary deferrals to certain highly compensated employees, or the employer-sponsor having to make additional contributions to the accounts of certain non-highly compensated employees..2

Rather than being subject to the ADP test and the possible consequences of a testing failure, Code Section 403(b) provides an alternative for tax-exempt employers. Instead of having to satisfy the ADP test, Code Section 403(b) applies the "universal availability" requirement to employee salary deferral contributions. Generally speaking, this requirement is self-explanatory—if the plan permits any employee to make salary deferral contributions, every employee must be permitted to make such contributions.3 However, the Code provides for limited exceptions to this requirement. One such exception is for employees who normally work fewer than 20 hours per week. Treasury regulations explain that an employee is considered to normally work fewer than 20 hours a week if: (1) the employee is reasonably expected to work fewer than 1,000 hours in the 12-month period following the commencement of employment (this is referred to as the "first year exclusion condition"); and (2) for each plan year ending after that initial 12-month period the employee worked fewer than 1,000 hours in the immediately preceding 12-month period (generally referred to as the "preceding year exclusion condition").

Following these rules, many tax-exempt employers exclude a worker expected to work fewer than 1,000 hours in his or her first year of employment from 403(b) plan participation. After the conclusion of that first year of employment, many employers typically only permit such a part-time employee to make salary deferrals contributions in a subsequent plan year only if they had worked 1,000 hours or more in the immediately preceding year.

In 2013 and again in 2015, the IRS issued model language for pre-approved 403(b) plans, making it clear that this treatment of part-time employees is improper. Rather, the exclusion is to be applied such that once a part-time employee works 1,000 hours in a year, they must be permitted to make salary deferral contributions not only in the next year but each year thereafter. This has become known as the "once-in, always-in" (or "OIAI") rule.

Having only clarified this application of the part-time employee exclusion to the universal availability rule in 2015, and then only in guidance that applied to pre-approved plans, many employers did not take notice and continued to operate their plans as they had been—incorrectly excluding certain part-time employees who had once worked 1,000 or more hours in any prior year. In order to rectify this problem, the IRS issued the Notice providing for relief for 403(b) plans that were improperly administered or drafted in this regard.

OIAI Relief

Operational Relief

Under the Notice, 403(b) plans that had improperly excluded part-time employees under the mistaken interpretation of the exception to the universal availability rule will not be considered as having failed to satisfy the universal availability requirement, provided that such plans were consistently administered under the first year and preceding year exclusion conditions. In other words, an employer may have interpreted the exclusion incorrectly but the employer applied that incorrect interpretation consistently from year-to-year and part-time employee to part-time employee.

This relief is extended for the period starting with the first tax year beginning after December 31, 2008, (the general effective date of the Code Section 403(b) final regulations), and through the last exclusion year that ends before December 31, 2019. Thus, for plans that use the calendar year as the exclusion year, the relief period ends December 31, 2018. Accordingly, such plans must act immediately to rectify any improper part-time employee exclusion and extend the opportunity for previously improperly excluded part-timers to make salary deferral contributions starting January 1, 2019.4

Plan Document Relief

Having been approved by the IRS, pre-approved Section 403(b) plans should already include language that incorporates the OIAI exclusion condition retroactive back to when Section 403(b) regulations became effective in 2009. However, if an employer using a pre-approved 403(b) plan document did not correctly implement the OIAI exclusion condition, the plan has an operational error (i.e., a discrepancy in the plan's operation and in the plan's language). This Notice provides relief from this operation error, and no plan amendment is required.

Individually designed plans that do not properly reflect the OIAI rule will have until March 31, 2020, (i.e., the generally applicable remedial amendment period for individually designed 403(b) plans), to amend the plan (retroactive to as far back as 2009 as may be necessary) to properly reflect the OIAI rule.

Fresh-Start Opportunity After Relief Period Ends

The Notice also provides a "fresh-start" opportunity for 403(b) plans that were not in operational compliance with the OIAI requirement. Starting with exclusion years beginning on or after January 1, 2019, these plans will not be treated as having been out of compliance with the part-time employee exclusion rule provided the plan properly applies the rule as if it were first effective on January 1, 2018. Accordingly, if a part-time employee hired before 2018 did not work 1,000 hours or more in 2018, he or she does not need to be offered the opportunity to make salary deferral contributions in 2019 (assuming such employee hasn't already been extended this opportunity). This fresh-start opportunity does not require an amendment to the plan document.

Immediate Action Steps

Tax-exempt employers who exclude part-time employees from making salary deferral contributions to their 403(b) plans should immediately review their plan administrative practices and determine whether the exclusion was properly applied in the past years. Regardless, starting next month, these plans will need to ensure that part-time employees who worked 1,000 hours or more in 2018 are extended the opportunity to contribute starting in 2019.


1 Taxable entities are prohibited from establishing a 403(b) plan.

2 These corrective contributions are referred to as "qualified non-elective contributions" or "QNECs", and must be fully vested upon contribution.

3 The universal availability requirement does not apply to employer contributions (i.e., match or non-elective contributions).

4 Plans that use the calendar year as the "exclusion year" will necessarily have an overlap of the first calendar exclusion year and the first 12 months of employment. So long as the plan has treated these overlaps consistently, the relief granted under the Notice applies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions