4038 / What nondiscrimination requirements must a tax sheltered annuity meet?
The SECURE Act 2.0 created new rules so that long-term, part-time employees will be permitted to participate in 403(b) plans. Starting in 2025, the rules governing long-term part-time participation apply both to defined contribution plans and ERISA-governed 403(b) plans.
Prior to 1989, there was no requirement that all employees, or that all of any class of employees, be made eligible for participation in an employer’s tax sheltered annuity plan. In years beginning after 1988, except for contracts purchased by certain churches or church-controlled organizations, tax sheltered annuities must be provided under a plan that meets certain nondiscrimination requirements.1
Notice 89-23 provided that a tax sheltered annuity plan would be deemed to be in compliance with these nondiscrimination requirements if the employer operated the plan in accordance with a reasonable, good faith interpretation of the requirements.2 Notice 89-23 provided guidance for complying with the nondiscrimination rules. Also, transitional safe harbors were generally available for tax sheltered annuities to meet most of these requirements.