Common Mistake #2: The opportunity to elect a salary deferral was not given to all eligible employees.

403(b) plans are subject to the Universal Availability Rule, which requires that if any employee is permitted to make elective deferrals, the same opportunity must be extended to all eligible employees. Generally, if an employee meets the plan’s eligibility requirements, they may begin participating immediately upon hire. Certain participants, as indicated below, are permitted to be excluded from the participation in 403(b) plans, but employers are required to document any excluded groups by implementing a written plan provision. Permitted exclusion groups include:

• Non-resident aliens
• Employees who normally work less than 20 hours in a week
• Students employed by the school they are enrolled in as defined in IRC 3121 (b)(10)
• Employees who are eligible to participate in another qualified plan sponsored by the employer
• Employees who will likely contribute less than $200 in the year

If a Plan excludes these participant groups without written provision or excludes other eligible participants, the mistake can be very costly, possibly leading to the loss of the plan’s tax deferred status. The Universal Availability Rule also contains an effective opportunity requirement meaning that employees must be provided with an opportunity to make or change their elective deferral at least once each Plan year.

To find an error of this nature, compare a list of all employees who received a W-2 with a list of Plan participants. For all employees not participating in the Plan, ensure they are either properly excluded from the Plan by class or have received timely notice of their eligibility. If eligible employees were improperly excluded, corrective non-elective contributions will likely be required to make up for missed deferral opportunities and lost earnings. For all employees who are participating in the Plan, confirm their eligibility. If a participant was improperly included (e.g., a nonresident alien or student excluded by plan terms), consult the Universal Availability Rules to confirm whether that group is required to be included due to operational practice. Errors regarding Universal Availability may be corrected without sanction using the Self-Correction program as long as sufficient compliance procedures are in place and the error is considered insignificant to the Plan as a whole. Otherwise, another correction method under EPCRS should be used.

To avoid mistakes in universal availability, ensure that you understand your Plan’s eligibility requirements as well as which employees can be excluded by law. If legally excluding a participant group, your Plan must contain a written provision stating the exclusion. Additionally, ensure that all eligible participants are receiving proper, timely notice of their eligibility.

For a complete listing of the most common 403(b) mistakes, please view the IRS 403(b) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.