Since the final 403(b) regulations were issued in 2007, a lack of clarity still surrounds the exclusion of "employees who normally work fewer than 20 hours per week" from eligibility to make elective deferrals to the plan.
In particular, colleges and universities do not have a clear answer on how to count hours for adjunct faculty who wish to make elective deferrals.
While there is no clear guidance on how adjunct faculty should be treated under the "fewer than 20 hours per week" rule, it might be reasonable to use an equivalency.
To determine whether adjunct faculty normally work fewer than 20 hours per week, an employee performing approximately half of the duties of an equivalent full-time employee would be considered to work 20 or more hours per week and should be given the opportunity to make elective deferrals.
For example, if a full-time faculty member normally teaches nine semester hours for two semesters, then an adjunct faculty member who teaches five or more hours per semester for two semesters (56% of full-time faculty) would be considered employed for 20 or more hours per week and should be permitted to make elective deferrals to the plan.
When asked specifically, an IRS auditor indicated that the use of such an equivalency was not necessarily wrong, but that typically, the auditor would still use the payroll review method and ask for additional information on the "fewer than 20 hours per week" determination if needed.
First, the auditor will ask the college or university to identify adjunct faculty and full-time faculty on the college or university's payroll. The salaries of the full-time faculty in a particular department are then compared with that of adjunct faculty in the same department.
If the salary of the adjunct faculty appears to be unusually high when compared with that of full-time faculty, the auditor will ask for more detail about the methodology used by the college or university for classifying the adjunct faculty members as employees who normally work fewer than 20 hours per week.
When asked what was believed to be the "gold standard" — in terms of supporting adjunct faculty determinations under the "fewer than 20 hours per week" rule — the hourly method was the clear answer from the IRS auditor.
The college or university should first estimate how many hours a full-time faculty member works. This estimate should include class time, office hours, research committee meetings, as well as time in the classroom and meeting with students. Then, that number should be compared with the hours worked by an adjunct faculty member in the same department.
The adjunct's estimated hours could then be expressed as a fraction of that full-time position. That factor would be the basis for applying the "fewer than 20 hours per week" determination.
With the introduction of the Affordable Care Act (ACA), many organizations began to use the standards used within ACA to apply to classifying employees' participating retirement plans. The IRS not only informally frowns on this but has also publicly taken a stance in both webinars and conferences that this is an unacceptable method to count hours in regard to an employee's eligibility to make elective deferrals.
Colleges and universities should determine how their current technique used for excluding adjunct professors under the "employees who normally work fewer than 20 hours per week" rule measures against the "gold standard." You may also apply the payroll test to determine if the salaries of adjunct professors excluded from elective deferrals appear out of line with the salaries of full-time faculty in the same department.
As an aside, it is important to note that adjunct professors can be excluded from employer contributions, but this action may have a negative impact on nondiscrimination testing.
It is best to consult with your legal adviser on your specific situation.
This information should not be considered tax or legal advice. GuideStone® stands ready to assist your organization as you work with your legal and tax advisers by providing resource information that you and your adviser may find beneficial.
Article
• Dec 30, 2020 