Some notice requirements are simply just one more administrative burden for the sponsor of a qualified retirement plan. For section 403(b) plans, ensuring that your employees have an effective opportunity to make elective deferrals is imperative. One benefit a 403(b) plan has over a 401(k) plan is that it does not have to comply with certain coverage or nondiscrimination requirements such as the ADP test. However, instead all 403(b) plans must comply with the universal availability requirement.
To satisfy the universal availability rule, all employees (some exceptions described below) must be permitted to make elective deferrals to the employer’s 403(b) plan. Further, if any employees have the right to make Roth contributions, all employees must be permitted to make such contributions. Like it sounds, the universal availability rule requires that all employees be provided with an effective opportunity to make an election, at least once per year, to contribute to a 403(b) plan.
There are few exceptions to the universal availability rule. For example, certain categories of employees may be excluded. These excluded categories are limited to employees that are eligible to make deferrals to another 403(b) plan offered by the same employer, employees eligible to participate in a 401(k) plan, students working for the school, college or university for which they are also enrolled, employees who normally work less than 20 hours per week, and nonresident aliens. Unless an employee is excluded, she must be provided sufficient notice of her right to make elective deferrals.
So how does an employer ensure sufficient notice is provided? Employers should establish administrative procedures that ensure employees are sufficiently notified of their right to make elective deferrals to the section 403(b) plan and allow the employee sufficient time to make such an election. This notice must be provided to new hires and ongoing employees. For new hires, the plan should provide notice of a new employee’s right to make deferral no later than 30 days after commencement of employment. The employer must allow the participant a period of not less than 30 days after the notice is provided to make an election. For ongoing employees, the plan must provide an annual notice of their right to make elective deferrals, even if the plan allows for participants to make an election or change an existing election at any time.
Failure to provide the universal availability notice could lead to the entire 403(b) plan losing its tax deferred status. For information on how to correct universal availability failures, the IRS has a helpful correction page.