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401(k) Eligibility vs. 403(b) Universal Availability
There is a distinct difference between when employees become eligible to participate in a 401(k) plan and a 403(b) plan. The following are the general distinctions.
- 401(k) plans – In order to qualify for and maintain its tax-exempt status, 401(k) plans are generally required to offer participation to employees, who have reached the age of 21 and have met a minimum service requirement. The minimum service requirement is specifically defined in the plan document and is based either on an hours of service requirement or a period of employment requirement.
- Plans using an hours of service requirement would require the employee to work at least 1,000 hours during a calendar year or a 12 month consecutive period from their start date.
- Plans using a period of employment requirement measure an elapsed time from the date the employee begins work at the organization.
- 403(b) plans – In order to qualify for and maintain its tax-exempt status, 403(b) plans that offer salary deferrals to employees are required to follow the universal availability rule, whereby the opportunity to defer salary into the plan is extended to all employees in the organization, with limited exceptions for:
- Part-time employees working less than 20 hours
- Employees who participate in another 401(k), 403(b) or 457 plan
- Non-resident aliens ? Employees who will make contributions of $200 dollars annually or less
- Certain students as described in the Internal Revenue Code
Regardless of whether the retirement plan is a 401(k) plan or a 403(b) plan, plan fiduciaries should exercise due care for ensuring and demonstrating that all eligible employees are given the opportunity to participate in the plan, in accordance with the plan document. Therefore, such concepts as understanding who is considered an employee by the plan document, how eligibility is communicated to employees, and documentation of employees declining participation in the plan should also be part of this process. Any questions should be addressed to qualified ERISA legal counsel.