Are Annual 403(b) Universal Availability Notices Required?
Employers with 403(b) arrangements have asked whether they are required to provide annual “university availability” notices. The statute and regulations do not explicitly require this. Code Section 403(b) contains a universal availability requirement, whereby participation is made available to all nonexcludable employees. This includes providing all eligible employees with an effective opportunity to participate. Effective opportunity is satisfied “only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election.” There are various ways to comply with the universal availability requirement, and whether this includes an annual notice depends upon the particular employer’s facts and circumstances.
The question about an annual notice may have been triggered, in part, by a compliance check that the IRS sent to education institutions to determine compliance with the 403(b) regulations. It asks, “How often do you communicate the opportunity to begin elective 403(b) salary deferrals?” and “How often do you communicate the opportunity to change an existing 403(b) deferral election?”
Open-ended questions like these suggest that these communications are required at a particular frequency. The regulations do not specify a required frequency. In fact, the text is similar to text in the 401(k) regulations: a 401(k) plan must provide an employee:
with an effective opportunity to make (or change) a cash or deferred election at least once during each plan year. Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including the adequacy of the notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.
Most practitioners do not believe that this provision requires a non-safe harbor 401(k) plan sponsor to give an annual notice to participants. Because the 401(k) regulations and 403(b) regulations are so similar in this regard, an employer with a 403(b) arrangement could reasonably interpret the 403(b) effective opportunity requirement as not requiring a formal notice. An annual notice might be one way to demonstrate effective opportunity, but presumably there are other ways.
Strategic Approach. Because the regulations are not as clear as they could be about this point, we have the following recommendations for employers:
- Be Aware of the Universal Availability Rule. This point is the most important one—employers need to be sure that they are giving all eligible employees an opportunity to participate in the 403(b) arrangement.
- Consider the Communication Strategy for the Plan, and How Often Changes Can be Made. How employers communicate to eligible employees, and how often changes can be made, are important from a general employee relations standpoint, let alone the universal availability requirement. Providing information about the 403(b) and any updates about deferrals, investment options, and other factors at different times during the year can help employees take advantage of the arrangement to save for retirement. If the employees are making changes to deferral elections or investment options throughout the year, that may indicate that communications have been effective, and that an additional universal availability notice is not necessary.
- Determine Whether a Notice Should Be Part of That Strategy. If employees can only begin participation or make changes once per year, an annual notice may be needed. Otherwise, an annual notice is probably not required, but an employer may choose to provide a notice anyway. This can help show compliance with universal availability, if the IRS ever were to audit the plan. Such a notice may also be useful in reminding employees that they can take advantage of the arrangement to save for retirement.
Ultimately, there is no one-size-fits-all approach to satisfying this rule. The important point is for an employer to make sure eligible employees have an effective opportunity to participate in the arrangement, and then determine whether an annual notice should be part of the communication strategy.