IRS Hands Employers Relief from Once-in-Always-In Violations

Employers with tax-exempt Section 403(b) plans are held to a “universal availability” eligibility rule that requires them to allow all employees to make employee elective deferrals to their plan. In the past, there has been confusion about whether part-time employees are permitted to make elective deferrals. Some employers inadvertently violated the rights of certain part-time employees by misinterpreting a policy called “once-in-always-in.” On December 4, 2018, the IRS issued Notice 2018-95 giving employers relief from their violations of this policy.

Once-In-Always-In Violations Against Part-Time Employees

Employers can exclude certain employees from elective deferrals, including part-time employees who typically work less than 20 hours per week. The trouble occurred when employers misunderstood the exclusion conditions:

  • First Year Exclusion Condition. An employer can exclude a part-time worker in their first year of employment if the employer can reasonably expect that employee to work fewer than 1,000 hours.
  • Preceding Year Exclusion Condition. For every plan year after the first year, the employer bases the employee’s ability to make elective deferrals on the number of hours worked in the preceding 12-month period.

However, the Preceding Year Exclusion Condition does not just apply to the immediate prior 12-month period. It applies to every preceding 12-month period. In essence, the employee cannot exclude a part-time worker who worked more than 1,000 hours in any 12-month period. This is the “Once-In-Always-In” (OIAI) rule.

And this is what some employers misapplied.

IRS Notice 2018-95 Addresses Improper Action

By issuing this notice, the IRS recognizes that some employers did not correctly apply the Preceding Year Exclusion. However, the notice goes beyond simply recognizing that errors were made – it provides some transition relief for non-compliant employers:

  • Operational Mistakes. Errors made by tax-exempt employers between December 31, 2008 and December 31, 2018 are essentially wiped out. However, their 403(b) plans must abide by the OIAI rule starting in January 1, 2019.
  • Fresh-Start Relief. If compliant as of January 1, 2018, the employer may exclude elective deferral opportunities to part-time workers in 2019 if the worker hired prior to 2018 did not work 1,000+ hours in 2018. This relieves the employer from the burden of reviewing numerous work periods for operational errors.
  • Plan Document Amendments. Most tax-exempt employers have until March 31, 2020 to bring their plan documents in line with the Once-in-Always-in rule.

Complying with Regulations for 403(b) Plans Is Never Easy

However, it is possible. If your company remains unsure of its 403(b) / once-in-always-in status, give us a call today.

At Hall Benefits Law, we can help employers develop plans that attract, motivate, and retain the brightest and best. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States, from coast to coast.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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