403(b) Universal Availability
Rev. 12/20/07, E-mail Alert 2007-17

The change in universal availability in 403(b) plans for elective deferrals.
Universal availability has always provided 403(b) plans with an advantage over 401(k) plans. Specifically, there is no ADP testing on a 403(b) plan because everyone is universally eligible to defer. Prior to the final regulations, Notice 89-23 had spelled-out a list of those who could be excluded. The final regulations incorporate and change the rules of this notice.

Perhaps the biggest surprise is that under the final regulations union employees are eligible to defer to a 403(b) plan. Thus, even though the goal of the IRS has been to make 401(k) and 403(b) plans more alike, the statutory exclusion of collectively bargained employees from qualified plans was not applied to 403(b) arrangements. Union employees were among those excluded from 403(b) universal availability prior to the final regulations (under Notice 89-23) that were not continued as excluded under the final regulations. Note that the plan may still exclude union employees from any matching contribution and/or employer contribution.

Below are the universal availability rules from final regulations:

The final regulations no longer permit the exclusion of the following groups of employees from making deferrals:

• employees covered by a collective bargaining agreement,
  
• visiting professors,
  
• individuals who make a one-time election to participate in a governmental plan,
  
• certain employees affiliated with a religious order who take a vow of poverty.

Under the final regulations 403(b) plans may still exclude the following groups from making deferrals:

• nonresident aliens with no US source income,
  
• students performing services under a work-study program,
  
• employees whose normal work week is less than 20 hours,
  
• employees eligible to defer to a 401(k) or 457(b) plan of the same employer.
  

Keep in mind that going forward, when employees are hired with an expectation that they will work less than 20 hours a week, in order to ensure that the employee does not become eligible, the employer must be sure that the employee does not work more than 1,000 hours in a 12 month period.

Other benefits not contingent upon elective contributions
The final 403(b) regulations add this qualified plan CODA rule to 403(b) arrangements. Specifically, a CODA may not condition (directly or indirectly) any other benefit with the exception of matching contributions, upon the employee’s electing to make or not to make elective contributions under the arrangement.