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Universal Availability Rule

“Can you explain the universal availability rule and does that apply to 401(k) plans?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Illinois is representative of a common inquiry related to 403(b) plans.

Highlights of the Discussion

The universal availability requirement is a rule that relates to eligibility to make elective deferrals in 403(b) plans—not 401(k) plans. It is the nondiscrimination test for 403(b) elective deferrals. Universal availability requires that if the sponsor of a 403(b) plan allows any employee to make elective deferrals to the plan, it must permit all employees to make elective deferrals as well [Treas. Reg. Sec. 1.403(b)-5(b)]. There are a few limited exceptions explained next.

The IRS allows a 403(b) plan sponsor to disregarding the following excludable employees when applying the universal availability test to their plans:

  • Nonresident aliens with no U.S. source income;
  • Employees who normally work fewer than 20 hours per week (or a lower number if specified in the plan document);
  • Student workers performing services as described in Treas. Reg. Sec. 31.3121(b)(10)–2 (note that medical residents are not considered to be students for this purpose);
  • Employees whose maximum elective deferrals under the plan are less than $200; and
  • Employees eligible to participate and make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer.

Under the fewer-than-20-hours-per-week and student worker exclusions listed above, if any employee who would be excluded under either exclusion is permitted to participate, then no employee may be excluded under that exclusion [ Treas. Reg. Sec. 1.403(b)-5]. Consequently, if the plan allows an employee working fewer than 20 hours per week to participate, the plan cannot exclude any employee using the fewer-than-20-hours-per-week exclusion.

A 403(b) plan may not exclude employees based on a generic classification such as the following:

  • Part-time,
  • Temporary,
  • Seasonal,
  • Substitute teacher,
  • Adjunct professor or
  • Collectively bargained employee.

However, if these employees fall under the fewer-than-20-hours criterion, then they may be excluded on that basis. For examples on the application of the exclusion, please see IRS 403(b) Universal Availability. The key to this exclusion is that a plan must determine eligibility for making 403(b) elective deferrals based on whether the employee is reasonably expected to normally work fewer than 20 hours per week and has actually never worked more than 1,000 hours in the applicable 12-month period.

And don’t forget, an employee is not considered to have had the right to make a deferral election unless he or she has had what the IRS calls an “effective opportunity” to make such an election. Effective opportunity is a facts-and-circumstances test. Essentially, at least once during a plan year, employees must receive a deferral notice and have a window of time to make or change a deferral election.

If a plan violates the universal availability rule, the effect can be loss of IRC 403(b) status. In that extreme case, contributions to the plan would become subject to income tax, employment tax and withholding. But the IRS wants to avoid that, so it provides correction remedies in its Employee Plans Compliance Resolution System (See the IRS’s 403(b) Fix-It Guide and Rev. Proc. 2019-19 for remedies.)


The ability to make elective deferrals in a 403(b) plan must be universally available to all eligible employees of a 403(b) plan sponsor. Be aware of the subtle nuances and follow IRS guidance on applying this important rule.

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