403(b) Universal Availability: Where Exclusions Go Wrong

March 3, 2025 · Financial Forte Staff

Historical article: prepared retrospectively using information available as of March 3, 2025.

A 403(b) plan can be generous to the employees enrolled in it while still overlooking people who should have had the opportunity to participate. The problem often begins with a familiar HR label: temporary, adjunct, substitute or part-time. Those classifications do not, by themselves, establish a permitted exclusion from salary deferrals.

Review eligibility under the plan's actual terms and the applicable universal-availability rules. Then verify that eligible employees receive an effective opportunity to make an election and receive confirmation that payroll implemented it. Retirement-plan access, employer contributions and health-benefit eligibility are separate questions and should not be governed by one generic “benefits eligible” field.^[1][2]

Start with the opportunity to defer

Under the general 403(b) universal-availability rule, if one employee can make elective deferrals, other employees must also have the opportunity unless a permitted exception applies. The rule concerns access to salary deferrals; it does not mean every employee must elect a contribution or receive an identical employer contribution.^[1]

The permitted exclusions are specific. They can include qualifying student employees, certain nonresident aliens, employees eligible to defer under another specified plan of the same employer and employees who satisfy the applicable part-time exclusion. Each requires its own conditions and consistent administration.^[2][3]

For the part-time exclusion, “normally less than twenty hours” involves the relevant hours-of-service tests and measurement periods, not simply the current weekly schedule. Once an employee fails the applicable part-time exclusion conditions, later lower hours do not generally restore that exclusion. The historical transition relief in Notice 2018-95 should not be treated as an open-ended 2025 exemption.^[2]

Confirm the employer and plan's status as well. Certain church and qualified church-controlled organization arrangements have a universal-availability exception, and ERISA coverage varies among 403(b) sponsors. Public-school, private nonprofit and church arrangements should not be assumed identical merely because all use 403(b) accounts.

Test the employee record rather than the job title

Consider a hypothetical private nonprofit whose ERISA-covered 403(b) includes a permitted part-time exclusion. An employee, Taylor, age 30, is coded “temporary” and works an irregular schedule. Assume the properly determined service periods show 540 hours in 2023 and 560 hours in 2024, and all other relevant conditions for 2025 entry are satisfied.

The long-term part-time rules applicable to ERISA-covered 403(b) plans beginning in 2025 can require deferral access after two consecutive years with at least 500 hours, subject to the statutory age and other requirements. Under the stated assumptions, Taylor's temporary label would not justify continuing the service-based exclusion.^[3]

That does not mean every employee with 500 hours in two calendar years automatically enters every 403(b). The correct periods, employer status, plan provisions and any separate permitted classification exclusion must be reviewed. Notice 2024-73 distinguishes the service-based part-time exclusion from qualifying student and certain other statutory exclusions.^[3]

Suppose Taylor wants to defer 4% of $24,000 of eligible annual compensation. That would be $960 over a full year, or $40 over each of 24 equal paychecks. If the election begins later in the year, use the actual remaining pay and checks rather than treating $960 as an automatic contribution. The employer should verify the valid election and actual compensation rather than assume the employee wishes to contribute because access is required.

If Taylor should already have been offered access, a new enrollment link may not by itself resolve the earlier omission. Ask the administrator to determine the affected period and applicable correction, including any required employer contribution and communication. Preserve the records used in that analysis and check whether employees with the same exclusion code were also affected.

Keep different benefit tests in separate fields

A health plan's hours threshold should not automatically decide retirement deferral eligibility. Similarly, eligibility for an employer retirement contribution may differ from the opportunity to defer salary. Build payroll and HR rules around the specific benefit and provision.

In the hypothetical employer, the retirement administrator identifies Taylor as eligible to defer while separately evaluating employer-contribution eligibility under the plan. HR updates the relevant retirement field rather than changing every benefit designation at once. That reduces the chance that fixing one error creates another.

Review employees whose hours increase, decrease or move between departments. Rehires and multiple roles can require information that no single supervisor sees. Assign responsibility for combining the service data and preserving the history.

Be careful with one-off exceptions. Allowing a favored employee to defer while excluding others in the same statutory exclusion category can create a consistency issue. Obtain the administrator's review before treating an informal accommodation as harmless.^[2][3]

Universal availability is not the 401(k) ADP test, and satisfying it does not establish that all employer-contribution nondiscrimination requirements are met. Ask the advisor to identify the tests applicable to each contribution source and the employer's status.^[1][3]

Verify the opportunity and keep evidence

Providing access means more than maintaining a plan somewhere in the benefits portal. Confirm that eligible employees know the opportunity exists, can make an election through the actual process and receive accurate implementation. Check whether communications reach employees who rarely use the employer's main email system.

For an ERISA-covered plan, following plan terms and monitoring service providers are part of the sponsor's responsibilities. Retain eligibility decisions, notices, election records and correction confirmations. For arrangements outside ERISA, confirm the governing tax and other obligations rather than assuming no oversight is needed.^[4]

Useful measures include employees awaiting an eligibility determination, missing service history and elections that did not reach payroll. Review exceptions regularly and after material changes in staffing or systems. Accurate access can improve employee understanding of the benefit while reducing correction risk; it does not guarantee a retention outcome.

Start with the employees excluded by broad labels and test the actual basis for each exclusion. A focused eligibility review can reveal whether the benefit is reaching the people entitled to use it and whether the systems support the plan the employer intended to provide.

Related reading

• 403(b) or 401(k) for a Nonprofit: Compare the Operating Model
• 403(b) Plan Decisions Start With Employer Eligibility

Have more questions about 403(b) eligibility and employer responsibilities? Email Dave at dave@financialforte.com to discuss your questions and next steps.

The contact invitation is current; it does not imply this contact path existed on the historical reference date.

Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.

Sources

• [1] Tax-Sheltered Annuity Plans — Publication 571 — January 2023 edition; 26 USC 403: Taxation of employee annuities — 2023 United States Code
• [2] IRS Notice 2018-95: Part-time 403(b) exclusion — 2018
• [3] IRS Notice 2024-73: Long-term, part-time employee guidance — Released October 3, 2024; applicable plan years after December 31, 2024
• [4] Meeting Your Fiduciary Responsibilities — September 2021