ISSUE

Many of our institutions have established retirement plans under I.R.C. Section 403(b).  Back in 2007, Treasury and the IRS issued final regulations that required a re-write (or original writing) of many institutions’ retirement plan documents.  Recently, because of myriad comments, the IRS has provided transition relief from some rules and a “fresh-start” opportunity for 403(b) plans with regard to the “once-in-always-in” (OIAI) condition for excluding part-time employees.

 

SITUATION

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

SCC’s CFO calls us to ask about the IRS’ “once-in-always-in” rules with respect to 403(b) retirement plans and part-time workers.  Their team had just attended a webcast by a retirement plan administrator and left that session with unanswered questions.  “We exclude part-time employees from our plan and may be out of compliance now – and since the end of 2008!” the CFO exclaims.

We tell them that the IRS issued final 403(b) regulations in 2007 which require that a § 403(b) plan must be a written plan that satisfies the requirements of the I.R.C. Section 403(b) regulations in both form and operation, and must include all the material terms and conditions for eligibility. These 403(b) regulations are generally effective for taxable years beginning after December 31, 2008.  Those regulations include a “codicil” which states that once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that the employee is a part-time employee.

However, at the end of 2018, the IRS issued Notice 2018-95 which provides some relief in 2019 and an opportunity for a potential “fresh start” beyond this year.  The Notice is somewhat technical, but we schedule a video meeting to go over SCC’s 403(b) plan document and walk through Notice 2018-95.

 

RULES

From IRS Notice 2018-95:

IRS provided relief period regarding plan language for tax years beginning after 12/31/2008, during which plans won’t be treated as failing to satisfy part-time exclusion merely because they weren’t operated in compliance with OIAI exclusion condition. However, IRS didn’t provide relief from other conditions of part-time exclusion, including 1st-year and preceding-year exclusion conditions and reg’s consistency requirement.

Purpose: This notice provides transition relief from the “once-in-always-in” (OIAI) condition for excluding part-time employees under § 1.403(b)-5(b)(4)(iii)(B) of the Treasury Regulations. Under the OIAI exclusion condition, for a § 403(b) plan that excludes part-time employees from making elective deferrals, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year (as defined in section 2.02(2) of this notice) on the basis that the employee is a part-time employee. In addition, in applying the OIAI exclusion condition for exclusion years after the transition relief ends, this notice provides a fresh-start opportunity for plans.

 

BOTTOM LINE

  • About 12 years ago, the IRS required changes to the written plan documents for many 403(b) plans.
  • The “Once-In-Always-In” rules for part-time employees have proven difficult to navigate for many schools – and other not-for-profits.
  • The IRS has issued relief in Notice 2018-95 that is fairly technical but should be reviewed by your institution.
  • Ask your qualified tax advisor about these issues and review your 403(b) plan document with them – or email us.  The tenets of the Notice could be valuable to you.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply. 

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