403(b) Nondiscrimination testing

ensure these plans fairly benefit a broad range of employees, specific regulations regarding coverage and nondiscrimination testing exist.

Understanding 403(b) plan coverage

A key aspect of 403(b) plan compliance is ensuring proper coverage. This means the plan must generally benefit a sufficient number of non-highly compensated employees (NHCEs). However, certain categories of employees can be excluded from coverage in a 403(b) plan.

Allowed exclusions from 403(b) plan coverage

According to IRS regulations, certain groups of employees can be excluded when determining if a 403(b) plan meets coverage requirements for deferrals. These commonly include:

• Students: individuals  considered students can often be excluded from participating in the deferral portion of a 403(b) plan.

• Employees working fewer than 20 hours per week: plans can exclude employees who typically work fewer than 20 hours per week.

It's important to consult specific plan documents and relevant IRS guidance to determine the exact eligibility rules and any other potential exclusions. Secure Act 2.0 added long-term, part-time requirements to 403(b) plans as of Jan 1, 2025, which can affect these exclusions.

Nondiscrimination testing for 403(b) plans: a simplified view

While 403(b) plans are subject to nondiscrimination rules, the testing they undergo is more limited compared to 401(k) plans. Notably, 403(b) plans are not subject to top-heavy testing or Average Deferral Percentage (ADP) testing.

The primary nondiscrimination test applicable to 403(b) plans is the Actual Contribution Percentage (ACP) test. This test focuses on employer contributions (like matching contributions) to ensure they don't disproportionately favor highly compensated employees (HCEs).

In essence, the regulatory framework for 403(b) plans aims to ensure that while certain employee groups can be excluded from coverage, employer contributions are still provided in a nondiscriminatory manner, allowing a broad range of eligible employees the opportunity to build secure retirement savings.