Minutiae. Thats what I try to explain those who continue to claim that 403(b) plans are “just another form of 401(k) plan;”  and is just what the drafters of the 2007 403(b) regulations did not wholly grasp when they tried to fundamentally reshape 403(b) plans to try to make them “just like” 401(k) plans. Its the small rule differences which make 403(b) plans so difficult to understand and handle on systems which are geared to administer 401(k) plans. It is those small differences upon which we really rely in trying to figure out solutions to the inevitable problems which arise when you actually try to run these plans.

The definition of “student” is just such a case in point. “Student ” status means nothing in the 401(k) world, but it is one of the few classes of employees  which can be excused by employers from the universal availability rule  of 403(b) plans. Student employees do not have to be given the opportunity its to make elective deferrals into the 403(b)-and given the often transient nature of student employment at colleges and university, this is a welcome exclusion.

But it is not everything it appears to be, and the details of this rule are often overlooked by  school plan administrators who are responsible for completing the plan documents. Code Section 403(b)(12((ii) limits the exclusion  to those “performing services described in section 3121(b)(10)” . This is the Student FICA Exemption, where any compensation earned by these employees is not considered “wages” for FICA purposes. These are effectively student employees earring compensation related to their field of study, but there is an extensive list of requirements which the IRS well describes. Effectively, for 403(b) purposes, you can exclude from deferrals those same students whose compensation is also excluded from the social security rules. There is  the added caveat that your exclusion of these students is subject to section 410(b)(4), which requires uniform treatment of that class-you can’t let some in and some not.  And finally, this is not an exclusion from from the non-discrimination rules for employer contributions, especially if your definition of compensation is W-2, not 3121….

Those organizations which do take advantage of the Student FICA Exclusion are often well versed in its use, but that knowledge may or may not spill over into those responsible for making plan document choices under the 403(b) plan. It is too easy sometimes to simply choose that exclusion without recognizing the details of that exclusion-especially when the employer is also choosing to exclude “students” (and not necessarily just those with the FICA exemption) from receiving any employer contributions, and may want to exclude all student employees from making elective deferrals.

The practical impact of this limited student employee exception is that employers do need to track most student employee hours, and need to keep them under the 1000 hour/work l less than 20 hours per week requirements if you wish to exclude them from the plan. And then you need to remember to apply the once in always in for these non-excludable student employees-which often comes into play when student s are pressed into service for either major projects or for overtime during summer employment. You also need to remember to elect separate treatment for FICA Exempt student employees than non-FICA Exempt student employees when completing the adoption agreement for the 2020 required 403(b) plan restatement.

Watch the Western Pension Benefits and Benefits Council webinar page for an upcoming presentation by Evan Giller and I, which will be sometime in the week  October 21(I think!) focusing just on this sort of significant minutiae.