In 2008, the IRS established a voluntary correction program aimed at plan sponsors and administrators to encourage resolution of plan document or operational failures as soon as they are discovered. The Employee Plans Compliance Resolution System, or “EPCRS” as it is most often called, stresses the importance of established administrative practices and procedures to avoid Internal Revenue Code failures that may arise from a lack of such practices and procedures. EPCRS consists of three programs, Self-Correction Program (SCP), Voluntary Correction Program (VCP), and the Audit Closing Agreement Program (Audit CAP). Each of the correction principles and methodologies in EPCRS apply to all three programs.

EPCRS has been a much-welcomed reprieve for plan sponsors and administrators. Compliance statements (an agreement between the Plan Sponsor and IRS that the proposed correction of plan failures is acceptable) have been granted to plans for over a decade in exchange for conforming amendments, corrective contributions and distributions, lost earnings calculations, and revisions to administrative practices and procedures. The EPCRS program is no stranger to updates over the years as several have resulted in an expansion of correction methodologies, additional SCP opportunities, and user fee adjustments.

The IRS introduced the most recent EPCRS transformation in September 2018, through Revenue Procedure 2018-52, which becomes effective next month, on April 1, 2019. The biggest change is to the VCP submission procedures. The IRS will no longer accept VCP submissions through the mail in hard-copy form; instead, Plan Sponsors must use the website for VCP submissions.

While the contents of a VCP submission have not changed, the submission follows a new process:

  • Applicant creates a account.
  • If the plan sponsor authorizes a Jackson Lewis attorney to sign and file the VCP on its behalf, a cover letter with a signed penalty of perjury declaration must accompany the submission.
  • The Form 8950, Application for Voluntary Correction Program Submission, will now be completed directly on the website.
  • All VCP submission documents (Model Forms, failure explanations, correction computations, plan documents, etc.) must be converted into one PDF file and uploaded to If the file exceeds 15 MB, the excess must be faxed to a dedicated IRS VCP fax number.
  • After the Plan Sponsor files a VCP, the system automatically generates a payment confirmation. The “ Tracking ID” on the receipt serves as the IRS control number for the submission. The IRS no longer issues a separate acknowledgment letter confirming receipt of the submission.

Any new procedure can seem daunting and time-consuming until it becomes familiar. Yet the efficiency that comes from a single uploading of documents, immediate generation of an IRS control number, and not having to bother with certified mailings will far outweigh any initial learning curve. Hopefully, plan sponsors will not make VCP submissions a habit, but when they are necessary, this new procedure will make the process nearly painless.

Contact your preferred Jackson Lewis attorney for assistance with all of your Voluntary Compliance needs or concerns.

As The ACA Landscape Shifts Again, What’s an Employer to Do?

As employers and their third-party administrators begin to wrap-up their Patient Protection and Affordable Care Act (“ACA”) reporting for the 2018 tax year, we’ve started to receive questions about what comes next.  As we discussed here, with the implementation of the Tax Cuts and Jobs Act of 2017 (the “Act”), the ACA’s “individual mandate” effectively lost its teeth—while the ACA still contains a requirement that individuals obtain health insurance coverage, the Act reduced the penalty for not doing so to $0.

This led to confusion initially for individuals who assumed the reduced penalty would become effective immediately (i.e., for 2018); however, this provision of the Act did not become effective until 2019.  Still, confusion remains, and for employers.  We’ve received several questions from clients about whether, given the Act’s changes, ACA reporting will be required for the 2019 tax year and beyond.  This is partly due to the effective end of the individual mandate, and partly due to uncertainty over whether the ACA’s other penalty provisions remain intact.  In short, with respect to the latter, they do.  As of this writing, employers with 50 or more full-time or full-time equivalent employees must continue to provide minimal essential overage that is affordable and provides minimum value to their full-time employees, or risk penalties under the ACA’s “employer mandate”.  (Similarly, the ACA’s insurance mandates for coverage of dependents until age 26, no exclusions for pre-existing conditions, etc. also remain in place.)  Certain states also have their own individual mandates that remain in effect.

The implementation of, and effective dates for, the various provisions of the ACA have been a moving target since its adoption, and it appears the ACA is poised to continue its evolution based on the federal election results in the coming years.  We also understand that the Internal Revenue Service is looking at whether there will be changes regarding the requirement to provide employees with their annual Form 1095-Cs going forward (i.e., the reporting of offers of coverage to employees that employees may use to prepare their individual tax returns).  Regarding the 2019 reporting, however, we are advising employers that the ACA remains the “law of the land”, and to assume that reporting for 2019 will look a lot like the 2018 reporting until we hear differently.

We will, of course, provide an update if new guidance on the future of ACA reporting is provided this year, and remain available for any past, present, or future ACA reporting questions our clients may have.

The IRS is on the Case – “Expansion of the Gig Economy Warrants Focus on Improving Self-Employment Tax Compliance”

The nature of work is changing with more and more individuals choosing to be “gig” workers rather than employees. This change fundamentally alters the availability of employee benefits, as well as the applicable taxation reporting and withholding requirements. It is no surprise to us that the Treasury Department has found that the underreporting of self-employment tax is a growing problem. Payers should keep a lookout for changes in reporting regulations – they are coming.

UPDATED – Did You Know California has a State Mandated Retirement Plan?

Frequently Asked Questions About CalSavers


What is CalSavers?


CalSavers is a new California law designed to encourage employees to save for retirement. CalSavers was originally called California Secure Choice and was approved by the State Legislature in 2016.

CalSavers provides employees a retirement savings program without the administrative complexity, fees, or fiduciary liability of existing options for employers. Most employers with at least five employees, that do not already offer an employer-sponsored retirement plan, will be required to begin offering a retirement plan or provide their employees access to CalSavers.

When an employer participates in CalSavers, the employer will deduct a default rate of five percent (5%) of pay from the paycheck of each employee at least eighteen (18) years or older and deposit it into the employee’s CalSavers account.  The deduction amount will automatically escalate one percent (1%) each year to a maximum of eight percent (8%), unless the individual employee elects a different amount, elects out of auto-escalation, or completely opts-out of the program.  A CalSavers account is a personal IRA account overseen by the CalSavers Retirement Savings Investment Board.


Which employers must participate?


Every California employer must participate in CalSavers if it has:

  • No retirement plan; and
  • Five (5) or more full or part-time California employees (with at least one employee eligible for CalSavers).

Employers that maintain employer-sponsored “retirement plans” to benefit their employees will be exempt from CalSavers. For the exemption, “retirement plans” will include 401(k) plans, qualified profit sharing plans, defined benefit plans, cash balance plans, and 403(a) and 403(b) plans, and arrangements under Section 457(b), 408(k) and 408(p) of the Internal Revenue Code (the “Code”). Employers participating in or contributing to union multiemployer pension plans will also be exempt from CalSavers.

The number of employees, for eligibility for CalSavers, is determined based on the average number of employees as reported to the California Employment Development Department for the quarter ending on the most recent December 31, and the previous three-quarters of available data from the reports.

Non-profit employers must comply with CalSavers, but certain employers are exempt, such as governmental entities.


When is it effective?


An ongoing pilot phase launched on Nov 19, 2018. The mandatory participation dates for employers subject to the mandate will phase-in yearly, based on the number of full-time and part-time employees working for the employer.

June 30, 2020, is the deadline for employers with at least 100 employees, and smaller employees will phase-in :

June 30, 2021:
50-99 employees

June 30, 2022:
5-49 employees

Early participation is also permitted, so beginning July 1, 2019, employers with at least five employees can voluntarily register for CalSavers if they wish to participate before their required registration date.


What are the advantages of participating in the CalSavers program?


  • Employers will have no liability for an employee’s decision to participate in, or opt out of, CalSavers;
  • Employers will have no liability for the investment decisions of participating employees;
  • Employers will not be a fiduciary of CalSavers; and
  • Employers will not bear responsibility for the administration, investment performance, or the payment of benefits earned by participating employees.


What are the drawbacks of the CalSavers law?


Employers may be concerned when they receive notices from the CalSavers Retirement Savings Investment Board stating that they must register with CalSavers. The CalSavers program will notify those employers that, based on available information, appear to be required to participate in CalSavers by the applicable registration deadlines and require those employers that have not previously registered for CalSavers to do so on or before the deadlines. However, there appears to be no way of preemptively establishing that an employer is exempt from CalSavers because it sponsors a retirement plan. In addition, there is no requirement that the CalSavers program search the Department of Labor’s database of Forms 5500 filings to determine which California employers already sponsor a retirement plan. For that reason, employers that already sponsor retirement plans, which are erroneously identified as employers required to participate in CalSavers, may inform CalSavers of their exemption from the program using procedures that still need to be established.


How does an employer participate in CalSavers?


  1. Register for CalSavers here;
  2. Upload their employee roster to enable enrollment of all employees;
  3. If applicable, designate a payroll services provider to facilitate on the employer’s behalf.; and
  4. Transmit the payroll contribution to a third-party administrator to be determined by the program.


What are the penalties for failing to comply with CalSavers?


Penalties of $250 per employee if the employer does not comply within 90 days of receiving a notice requiring registration and $500 per employee if the employer does not comply within 180 days of receiving the notice may be imposed.


What is the status of CalSavers?


The law is still in flux, and implementation may be subject to delays and changes.

In addition, there is a lawsuit seeking to strike down the law because the Employee Retirement Income Security Act (“ERISA”) (a federal law that governs employee benefits) preempts it. The State of California argues that CalSavers is not preempted because it is not established or maintained by an individual employer, but is established by the State of California, and because the program is completely voluntary for the employees.


Do any other states or cities have similar laws?


Connecticut, Illinois, Maryland, Oregon, and Seattle also have state or city-run retirement programs.


What is the takeaway?


Employers in California that do not want the administrative burden and expense of sponsoring a retirement plan can participate in CalSavers in order to give their employees an opportunity to save for retirement on a tax-free basis.

Employers that already sponsor their own retirement plans may receive notices that they must register for CalSavers when in fact they are exempt and need not register or participate.

Court Finds Union’s Withdrawal Liability Indemnification Obligation of Limited Duration

Congress enacted the withdrawal liability provisions of the Multiemployer Pension Plan Amendments Act (MPPAA) with the ultimate goal of protecting participants and beneficiaries entitled to benefits from multiemployer pension plans.  Congress observed that such plans are financially burdened whenever an employer withdraws and permanently ceases to pay contributions and decided that the burden should be borne by the withdrawn employer.  Consistent with this remedial purpose, the statute often produces seemingly harsh and/or unfair results (at least from the employer perspective.)  The Third Circuit’s recent non-precedential decision in Nitterhouse Concrete Products, Inc. v. Glass, Molders, Pottery, Plastics & Allied Workers International Union aptly illustrates this principle.

The employer in Nitterhouse had entered into a series of collective bargaining agreements with the union over a period of forty-four years, during which time it was obligated to contribute to a union-affiliated multiemployer pension plan.  Five days before the expiration of the final CBA in February 2014, the union disclaimed interest in represented the employer’s bargaining unit members and notified the employer it would not be renewing the CBA upon its expiration.  This resulted in the employer permanently ceasing to have an obligation to contribute to the plan, resulting in a withdrawal from the plan and the assessment of withdrawal liability against the employer in excess of $680 thousand dollars.

This alone would seem to be an unfair and inequitable result, with the union’s unilateral actions (in disclaiming interest) directly resulting in imposing significant withdrawal liability.  It gets worse, however.

For much of the parties’ collective bargaining history through its conclusion, the CBA contained the following provision:

Section 17.07 – Company Indemnification. The Company shall have no liability for the payment of benefits other than to make contributions to the Plan as above required. The parties hereto recognize that, as between the Union, and the Company, the operation of the Pension is within the control of the Union. Therefore, the Union specifically agrees that the structure and operation of the Pension Plan shall comply with all laws applicable to it, including by way of example, and not limitation, the Employee Retirement Income Security Act of 1974, as amended from time to time and further agrees to indemnify and save harmless the Company from any claim or liability which may arise by reason of the existence of the Plan.

In reliance on this provision, the employer sued the union, claiming that the indemnification provision covered the withdrawal liability incurred.  The district court first looked at whether withdrawal liability fell within the scope of the union’s indemnification obligation, concluding that “any claim or liability which may arise by reason of the existence of the Plan” is broad enough to include withdrawal liability under the MPPAA.

The district court next considered the duration of the union’s indemnification obligation, specifically whether it survived the expiration of the CBA.  Citing the general principle of contract law regarding a collective bargaining agreement that contractual obligations will generally cease upon termination of the bargaining agreement and the lack of any recognized exception, the district court concluded that the union’s indemnification obligation ended when the contract expired.  Since the withdrawal liability accrued after this (“even if by a mere nano-second”), the district court found for the union.

The sole issue before the Third Circuit on appeal was whether the district court properly held that the union’s indemnification obligation did not cover withdrawal liability imposed after the expiration of the CBA.  The Third Circuit affirmed.  The Court found that the employer could not withdraw and trigger withdrawal liability until it “permanently ceased to have an obligation to contribute,” and that such cessation could not occur until the termination of the CBA.  The Court analogized withdrawal liability to a chain of dominoes, with liability only imposed when the obligation to contribute ceased.  The court also found that the obligation to contribute only ceased when the CBA expired, which only happened if the CBA was not renewed after expiration.  As a result, the chain of dominoes came crashing down on the employer.

What can we learn from Nitterhouse?  It is easy to envision how the case could have been decided differently.  The withdrawal liability incurred by the employer seems to be a “claim or liability which may arise by reason of the existence of the Plan,” and the reference to the plan “being within the control of the union” at least arguably should encompass withdrawal liability triggered by the union’s unilateral conduct in disclaiming interest.  Unfortunately for the employer, the Court did not so find.  In sum, Nitterhouse highlights the pro-fund skew of MPPAA and the seemingly unfair results it often generates.  The case further illustrates the importance of good contract language drafting, since the result almost certainly would have been different had the indemnification provision been better crafted.

Wellness Programs Continue to Face Compliance Challenges

The rules for employer-sponsored wellness programs continue to be a moving target; most recently, regulations issued by the Equal Employment Opportunity Commission (“EEOC”) intending to address issues under the Americans with Disabilities Act (“ADA”) and the Genetic Information Non-Discrimination Act (“GINA”). Many employers are already well aware of the wellness regulations under the Affordable Care Act that for some years now have permitted incentives for certain health contingent programs, such as biometric screenings and tobacco cessation programs, in some cases allowing incentives of up to 50% of the applicable premium. But some of the same wellness incentives permissible under the ACA raise issues under the ADA and GINA. The EEOC tried to address some of those issues through regulation, but wound up losing in court against the AARP (formerly the American Association of Retired Persons) which challenged the EEOC’s methods for developing the regulations. So, we are basically back where we started, namely, what to do with wellness programs that are permissible with the ACA regulations, but may not be consistent with rules under the ADA or GINA (or programs that do not raise ACA issues at all, but still have compliance requirements under the ADA and/or GINA).

What’s the problem? We focus here on the ADA. In general, the ADA prohibits employers from subjecting employees to disability-related inquiries or medical examinations. One exception from this rule is that the inquiry or examination is part of a voluntary health program. However, the EEOC had not formally defined the term “voluntary” or explained what constitutes a “health program.” Thus, it had been unclear whether employers could offer incentives to encourage employees to participate in programs that involved such inquiries or examinations, something the ACA clearly permitted. The EEOC finally issued regulations to permit certain incentives for employees to answer disability-related questions or undergo medical examinations that would not cause the program to be involuntary. As noted, those regulations have been vacated.

EEOC modifies its regulations. On December 20, 2018, in response to the AARP decision, the EEOC revised its regulations to remove the incentives that had been permitted.  What remains in the regulations presently is that a health program that includes disability-related inquiries or medical examinations (such as a health risk assessment or biometric screening) is voluntary as long as the program meets certain requirements:

  • Employees may not be required to participate;
  • The employer may not deny coverage or limit the extent of benefits under any of its group health plans or package options for employees who do not participate;
  • The employer does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate, or threaten employees; and
  • The employer provides employees with a confidentiality notice that: (i) is understandable; (ii) explains the type of medical information that will be obtained and the specific purposes for which the medical information will be used; and (iii) describes the restrictions on the disclosure of the employee’s medical information, the employer representatives or other parties with whom the information will be shared, and the methods that the covered entity will use to ensure that medical information is not improperly disclosed (including whether it complies with the HIPAA privacy and security regulations).

What remains unclear is whether offering an incentive to an employee to participate in a disability-related inquiry or medical examination as part of an otherwise compliant program would be viewed by the EEOC to be impermissible. Notably, prior to issuing its wellness program regulations, the EEOC had sued employers over the design of their health plans, including in cases where the programs appeared to be more consistent with typical program offerings and incentives.

Note that the EEOC made similar changes to its regulations under GINA that had permitted inducements to an employee for the employee’s spouse to provide his or her current health status information as part of a health risk assessment administered in connection with an employee-sponsored wellness program. Employers should review their wellness programs carefully, and not just those that are tied to their group health plans, to see whether they are compliant with the ADA and GINA.



Interim IRS Guidance Addressing Taxation Impact of Transportation and Parking Fringe Benefits Creates Planning Opportunities for Employers

In Notice 2018-99, the Internal Revenue Service sets forth interim guidance for taxpayers to determine parking expenses for qualified transportation fringes (QTFs) that are nondeductible and for tax-exempt organizations to determine the increase in unrelated business taxable income (UBTI) attributable to nondeductible parking expenses.  The Tax Cuts and Jobs Act (Act) amended these tax provisions effective for amounts paid or incurred after December 31, 2017.


As you may already know, the Act changed the tax law to disallow a deduction for expenses regarding QTFs, which are pre-tax benefits, provided to employees for transportation in commuter highway vehicles, transit passes, and qualified parking.  Because tax-exempt organizations do not take deductions for QTFs, the Act also increases a tax-exempt employer’s UBTI by the QTF expense that is not deductible – in an effort to put taxable and tax-exempt employers on equal footing.  The Notice explains how employers can determine the portion of the QTF expense that is not deductible or is treated as an increase in UBTI.

Determination of Nondeductible Parking Expense or Increase in UBTI

The method used to determine the nondeductible amount depends on whether the employer pays a third party to provide the parking facility, or leases or owns the parking facility.

Pays a Third Party – If the employer pays a third party to provide parking for the employer’s employees, the amount disallowed as a deduction under Section 274 of the tax code generally is the employer’s total annual cost of employee parking paid to the third party.

  • Note that if this amount exceeds the monthly limitations to provide the benefit to employees on a tax-free basis ($260 per month in 2018, $265 in 2019); the excess amount is treated as compensation and wages to the recipient employee.
  • The amount treated as compensation wages is not subject to the disallowance deduction.

For example, if an employer pays a third party $300 per month for each parking spot it uses for employees, the annual amount disallowed normally would be $300 x 12 months for each spot.  But because this exceeds the monthly limitation by $35 (the excess of $300 over $265 for 2019), the $35 must be included in the employee’s taxable wages and is deductible by the employer.  The amount disallowed to the employer under Section 274 is limited to $265 per month.

Owns or Leases Parking Facility – If the employer owns or leases the parking facility where its employees park, the disallowance may be calculated by using any reasonable method.  The Notice then describes a four-step process the IRS deems is a reasonable method.

Step 1 – Calculate disallowance for reserved spots. 

The employer must identify the number of spots reserved for employees and determine the percentage of reserved spots as compared to total spots.  The employer then multiplies this percentage by the employer’s parking expense for the facility – this is the disallowed deduction amount.

  • Employer Note: Until March 31, 2019, employers that have reserved employee spots may decrease or eliminate them and treat them as not reserved retroactively to January 1, 2018.  This creates a significant planning opportunity to change signage or access to parking spaces to mitigate the impact of these tax law changes.
  • Planning Opportunity Illustration: Assume a tax-exempt organization leases space in a parking garage for $150,000 per year ($250 per month per space) and designates 10 of the 50 spaces as “Employee Parking Only.”  This organization will be subject to UBIT on an amount equal to $30,000, which is calculated by multiplying $150,000 by the ratio of 10 reserved employee spaces to 50 total spaces.  If the tax-exempt organization simply removes the sign to eliminate the reserved employee parking, it may avoid UBIT if, under Step 2 below, the primary use of the parking garage is to provide parking to the general public.  The same adjustment by a for-profit employer may make the nondeductible expense deductible.

Step 2 – Determine the primary use of remaining spots. 

If the primary use of the remaining spots is for use by the general public, the remaining expenses may be deducted.  “Primary use” means greater than 50% of the estimated or actual usage of the parking.  The general public includes, but is not limited to, customers, clients, visitors, patients, and students.

Step 3 – Calculate allowance for reserved nonemployee spots. 

If the primary use of remaining spots is not to provide parking to the general public, the employer may identify the number of spots reserved for nonemployees (e.g., visitors, customers, partners, sole proprietors).  These spots might be reserved with signage (“Customer Parking Only”), barriers, or a separate entrance.  An employer then may determine the ratio of reserved nonemployee spots in relation to total parking spots and multiply this percentage by the total remaining parking expenses to determine the amount that is not disallowed.

Step 4 – Determine the remaining use and allocable expenses.  The Notice provides a final step to allocate remaining parking expenses to employee or nonemployee use.

Employer Takeaway – If an employer provides parking to its employees, it should review the information in the Notice carefully.  If practical, it may want to eliminate reserved spots for employees and make over 50% of the spots available to the general public.

Making the Loss of the SALT Deduction Sting a Little Less

As tax time rapidly approaches, taxpayers in states with high state and local income taxes (such as New York) are about to learn, up close and personal, just how much the loss of the deduction for state and local taxes (SALT) will affect their personal tax liability.  A little-publicized provision of the New York Tax Law, however, may take away some of the sting of losing the SALT deduction.

Under Section 612(c)-3(a) of the New York Tax Law, taxpayers age 59½ or older may exclude up to $20,000 of qualified pension and annuity income from their Federal adjusted gross income for purposes of determining their New York adjusted gross income.  The full $20,000 exclusion is also available in the year the taxpayer attains age 59½ with respect to pension and annuity income received on or after you became 59½.  And married couples age 59 ½ may each capitalize on the exclusion even if they file a joint return.  As a result, up to $40,000 per year can potentially be excluded from New York State income taxation.  Note that these taxes are not deferred; they will never be paid.

It should be noted that taking advantage of the New York state exclusion would result in some acceleration of Federal income tax, since the exclusion only applies to amounts included in the taxpayer’s Federal adjusted gross income.  The benefits of deferring taxation on the investment earnings prior to distribution must also be factored in.  (This may be ameliorated somewhat by using a “Roth” conversion along with the taxable distribution.  Roth accounts are taxed up front, but future investment earnings and distributions are not subject to income tax.)

There are many variables at work here, and everyone’s tax situation is unique.  Even so, the provisions of the New York State Tax Law (and those of several other states, including South Carolina and Colorado) may provide an opportunity to limit the state and local tax bite on your retirement assets.  We suggest that you discuss this with your tax advisor.

New Interim Guidance for Tax-Exempt Organizations Paying Excess Executive Compensation

As we previously reported, under the Tax Cuts and Jobs Act, starting in 2018, tax-exempt organizations are subject to a 21% excise tax on (i) remuneration exceeding $1 million paid to a “covered employee” in a tax year, and (ii) any “excess parachute payment” paid to a covered employee.  The IRS has recently published Notice 2019-9 which provides interim guidance for the application of this new excise tax.  Please see our Special Report – IRS Notice 2019-9 Provides Interim Guidance for Tax-Exempt Organizations Paying Excess Executive Compensation – which provides a high-level summary of the Notice.

Important Guidance and Relief for 403(B) Plan Sponsors Who Exclude Part-Time Employees

In the spirit of the holidays, the Internal Revenue Service gave a gift to sponsors of 403(b) tax-deferred annuity plans on December 4, 2018, by issuing IRS Notice 2018-95.  For plan sponsors that exclude part-time employees from their 403(b) plans, this gift provides a 10-year nod on their historical plan administration, despite noncompliance with the once-in-always-in part-time exclusion condition.

The Notice contains many conditions to qualify for the relief.  It also does not provide blanket relief covering all potential administrative issues involving the exclusion of part-time workers.  So, just as important as the relief itself is what the relief does not cover, serving as an important reminder to plan sponsors about the circumstances in which part-time employees may be excluded from 403(b) plans.

The 403(b) Plan Universal Availability Requirement

One of the tax-law based nondiscrimination requirements applicable to 403(b) plans is the “universal availability” requirement.  This requirement means what is says – generally, if any employee is allowed to make elective deferrals into the plan, every employee must be permitted to do so.  The plan must be universally available.

There are some important exceptions to this requirement, one of which relates to part-time employees.  Your Section 403(b) plan can exclude part-time employees from participating.

Importantly, this exclusion of part-time workers must be in your written plan document.  You cannot simply exclude part-time employees or classes of employees who typically work part-time hours operationally, taking the position only full-time employees are eligible.  This is a legal compliance issue requiring correction and to which IRS relief is not available.

Who Qualifies as a Part-Time Employee?

Like most employee benefit rules, there is a technical legal meaning to the term “part-time.”  This definition may not jive with your employment practices, and it is not the opposite of “full-time” as under the Affordable Care Act (“ACA”).  So, this tends to be an area ripe for legal compliance issues.

Under the Section 403(b) regulations, an individual is part-time if:

  • Looking forward from their first date of hire, you do not expect them to work at least 1,000 hours during their first year of employment (the “first-year exclusion”); and
  • Looking backward for each year ending after the initial year, the employee did not actually work 1,000 hours (the “look back exclusion”). The plan can use either anniversary dates or the plan year when applying these rules.

These concepts are similar to the ACA measurement methods involving variable hour employees.  However, it should be noted, they use the retirement plan 1,000 hours of service requirement, in lieu of the 30- hour requirement used for group medical plans.

The Once-In-Always-In Condition

Simply applying the above rules for excluding part-time employees is not enough to meet the universal availability requirements.  Instead, there is a third requirement — the once-in-always-in condition, which says:  Once an employee meets the 1,000-hour requirement, that employee no longer can be excluded from the 403(b) plan based on being a part-time employee.

For example, say you hire Joe Blow in June of 2016, expecting Joe to work 750 hours per year.  But, Joe actually works 1040 hours during his first year of employment and 750 hours every plan year after that.  The ONLY year for which you would be permitted to exclude Joe from your plan is Joe’s first year when you reasonably expected him to work under 1,000 hours.  Because Joe actually worked 1,040 hours during that first year, Joe can no longer be excluded from the plan based on being a part-time employee for succeeding years.  This is true even though Joe never again works 1,000 hours.

Note how different this rule is from the ACA regulations, which enable employers to apply the look-back rules during measurement periods on a year-by-year basis, resulting in employees coming in and out of group medical plans during their periods of employment.

Many employers have administered their 403(b) plans like their group medical plans where part-time employees come in and out of eligibility based on the number of hours they worked during the prior year.  So in the case of Joe Blow, many employers would have let Joe into the 403(b) plan based on his actually working 1,040 hours during his first 12-months of employment.  Yet after that first plan year of participation, they would have excluded Joe from the 403(b) plan by virtue of his working only 750 hours per year.  This is not allowed by the once-in-always-in condition and is what the IRS relief specifically addresses.

Operational Relief from the Once-In-Always-In Condition

During the relief period (defined below), the IRS has said that a plan will not be treated as failing to satisfy the requirements for the part-time employee exclusion simply because the plan did not apply the once-in-always-in condition.  Stated differently, the relief applies only if:

  • The plan contains an express exclusion of part-time employees;
  • The plan administrator applied the first year exclusion rule correctly;
  • The plan administrator applied the look back exclusion rule correctly for subsequent plan years;
  • No employees working part-time hours received different or special treatment (such as allowing an executive’s child working 10 hours per week to participate in the 403(b) plan when others working similar hours are excluded); and
  • The only mistake is that the plan had part-time employees coming in and out of participation based on the number of hours they worked each year.

Section 403(b) plans that are individually designed also must be amended on or before March 31, 2020, to reflect that the once-in-always-in condition was not applied.  Comparatively, pre-approved Section 403(b) plans, such as those that use an Adoption Agreement platform, are not required to be amended as a condition of this relief.

Take the example above where Joe Blow was hired in June of 2016 with the expectation of his working 750 hours per year.  But Joe Blow actually worked 1040 hours during his first year of employment and 750 hours every year after that.  If the employer allowed Joe Blow to participate after he actually worked 1040 hours, but then excluded Joe thereafter based on his working 750 hours per year (in violation of the once-in-always-in condition), then the plan should qualify for the operational relief described in the IRS Notice, assuming the plan is amended, as needed.

Relief Period

The relief period begins with tax years beginning after December 31, 2008, (January 1, 2009, for calendar year plans).  This is the general effective date for the Section 403(b) regulations, which set forth the once-in-always-in requirements.  The relief period ends on one of two dates:

  • For plans that use a plan year basis of measurement, the last day of the last exclusion year that ends before December 31, 2019, (December 31, 2018, for calendar year plans);
  • For plans that use an anniversary date basis of measurement, the last day of the employee’s last exclusion year that ends before December 31, 2019, (e.g., July 19, 2019, for an employee hired on July 20, 2015).

Fresh Start Opportunity

The IRS Notice also contains a special rule, allowing plans essentially to start over and have a fresh start on the administration of the once-in-always-in condition.  This enables employers to apply the once-in-always-in condition for years that begin on and after January 1, 2019, as if the condition first became effective January 1, 2018.  This means that the plan can ignore the prior application of the once-in-always-in condition in determining whether an employee should be offered an elective deferral opportunity during the 2019 plan year.

Back to our example:  Because Joe worked only 750 hours during 2018, Joe may be excluded during the 2019 plan year, even though Joe worked over 1,000 hours during his first year of eligibility beginning in June of 2016.  The plan gets a fresh start and need only look back to the 2018 exclusion year in determining whether Joe should be offered an elective deferral opportunity during the enrollment period for 2019.

Plans need not be amended to reflect the use of this fresh start opportunity. 


Employers who sponsor 403(b) plans that exclude part-time employees, but which have been administered in contravention of the once-in-always-in condition just received a significant gift.  This relief has the potential for saving employers material amounts in the form of corrective contributions.  That said, it is crucial that employers who qualify for this relief act now to ensure they administer their plans correctly starting in 2019 and, for individually designed plans only, amend their plans on or before March 31, 2020, to reflect plan’s actual operations.

The relief is very narrow and does not extend to more general failures to comply with the terms of the plan.  For example, employers who have been excluding part-time employees from their 403(b) plans when the plan does not contain this explicit exclusion and employers who have excluded employees who normally work fewer than 30-hours per week from their 403(b) plans (rather than applying the 1,000 hours of service rules) are not covered by this relief.  These employers should seek counsel on the correction of the operational failures under the IRS Employee Plans Compliance Resolution System (“EPCRS”), the latest version of which is IRS Revenue Procedure 2018-52.