Compliance December 6, 2018

IRS Offers Relief for 403(b) Plans Excluding Certain Part-Time Employees

Under the once-in-always-in 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 on the basis that the employee is a part-time employee.

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The IRS has issued Notice 2018-95, which provides transition relief from the “once-in-always-in” (OIAI) condition for excluding part-time employees from 403(b) plan eligibility under Section 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 on the basis that the employee is a part-time employee.

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The IRS explained that when it announced the opening of document submissions for its 403(b) pre-approved plan program, it issued a List of Required Modifications (LRM) which included the OIAI condition. However, commenters requested transition relief with respect to the OIAI condition, stating that many employers were not aware that the part-time exclusion included that condition.

Commenters noted that the OIAI condition was not specifically highlighted in writing until the 2015 LRMs were issued, and that, even then, the LRMs were directed at drafters of pre-approved plans and not adopting employers or sponsors of individually designed plans. As a result, the commenters argued, many 403(b) plan sponsors did not follow the OIAI condition.

So, the Treasury Department and the IRS are providing transition relief from the OIAI condition, including relief regarding plan operations for a transition period referred to as the “Relief Period,” relief regarding plan language, and a fresh-start opportunity after the Relief Period ends. The Relief Period begins with taxable years beginning after December 31, 2008, (the general effective date for the 403(b) regulations). For plans with exclusion years based on plan years, the Relief Period ends for all employees on the last day of the last exclusion year that ends before December 31, 2019.  For plans with exclusion years based on employee anniversary years, the Relief Period ends, with respect to any employee, on the last day of that employee’s last exclusion year that ends before December 31, 2019.

During the Relief Period, a plan will not be treated as failing to satisfy the conditions of the part-time exclusion merely because the plan was not operated in compliance with the OIAI condition. 

The Notice offers examples of the relief provided. 403(b) plan sponsors have until March 31, 2020, to adopt a pre-approved plan document and to make sure their plan has been operating in accordance with the plan terms.
Data & Research December 6, 2018

S Corporation ESOPs Can Give Workers a Retirement Savings Advantage

In such plans, they have more than twice the average retirement balance of other workers.

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S Corporations are likely to be fully employee stock ownership plan (ESOP) owned, and S Corporation ESOPs, in particular, tend to prepare workers much better for retirement than other types of workplace retirement savings plans, according to the National Center for Employee Ownership (NCEO).

ESOP participants have an average retirement balance of $170,326, more than twice the $80,339 that other workers have saved, NCEO says. Even for ESOP employees making less than $25,000 a year, their balances average $55,526, compared to the $22,447 that their counterparts have saved at other companies.

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Ninety-seven percent of companies with an ESOP offer at least one other retirement plan in addition to the ESOP. By comparison, 32% of workers in the U.S. are not offered a retirement savings plan. Among the 68% who are offered a retirement savings plan at work, 49% do not participate in it.

S ESOP workers nearing retirement have a median account balance of $147,522 in their ESOP plus $98,942 in non-ESOP plans. By contrast, 35% of all workers nearing retirement have neither individual retirement savings or a pension. Among low-income workers nearing retirement, 50% have neither retirement savings or a pension.

As such, NCEO says, the median account balance for all U.S. workers between the ages of 55 and 64 is zero. Among workers who have retirement accounts, the median balance is $100,000.

Millennial workers at S ESOP companies have a median ESOP account balance of $22,588 and $11,239 in a non-ESOP account. In contrast, the median savings of U.S. Millennials is zero.

Lower wage workers at S ESOP companies, those making between $10 and $12.85 a hour, have a median ESOP account balance of $4,381 and $2,149 in a non-ESOP account. In contrast, nationally, 56% of workers in this category are not offered any retirement benefits at work, translating their median savings to zero.

NCEO says there are 6,669 ESOPs in the U.S. with 14.4 million participants and $1.3 trillion in assets. Among them, 3,192 are S corporations, which have 850,000 participants and $80 billion in assets.

NCEO says that while employees must select their deferrals into a 401(k), which are commonly matched with a company contribution, in a ESOP, the company must allocate contributions based on relative pay or a more level formula not determined by what employees put in.

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