As employers look for creative ways to help employees manage their student loan debt, the IRS recently ruled that employer nonelective contributions to a 401(k) plan for employees who make student loan repayments would not violate the Internal Revenue Code’s contingent benefit rule. That rule prohibits an employer from making any benefit (other than matching contributions) contingent, directly or indirectly, on an employee’s making, or not making, elective deferrals under the 401(k) plan.
The guidance came in the form of a Private Letter Ruling (“PLR”), which may only be relied on by the employer who requested the ruling. Nonetheless, the PLR is instructive for other employers wishing to provide similar tax-favored benefits for employees who may not otherwise be in a position to contribute to their retirement savings.
In the PLR, the employer’s 401(k) plan provided a 5% match on eligible compensation for each pay period in which the employee made an elective deferral of at least 2% of eligible compensation. The employer proposed amending the plan to allow employees to opt out of the 5% match and, in lieu thereof, receive nonelective contributions to the plan equal to 5% of their eligible compensation for each pay period in which they make student loan repayments of at least 2% of their eligible compensation. Employees participating in the student loan repayment program would be eligible for a true-up matching contribution for any pay period in which they made elective deferrals to the plan but failed to make the 2% student loan repayment necessary to receive the nonelective contribution for such pay period. These nonelective and true-up matching contributions would be subject to the same vesting schedule as regular matching contributions and would be deposited in an employee’s account as soon as practicable after the end of the plan year if he/she were employed on the last day of the play year (except in the case of death or disability). The nonelective contributions would be subject to all plan qualification requirements and would not be treated as a match for 401(m) discrimination testing purposes (but any true-up matching contribution would be). All employees eligible to participate in the 401(k) plan would be eligible to participate in the program and could opt out prospectively at any time and resume eligibility for regular matching contributions. The employer represented that it had no intention of extending student loans to any employee eligible for the program.
Based on these facts, the IRS concluded that the proposed program would not violate the contingent benefit rule because receipt of the nonelective contributions was conditioned on making student loan repayments and employees could continue to make elective deferrals to the 401(k) plan while participating in the program.
While the PLR confirms that in some cases 401(k) contributions can be linked to student loan repayments, certain plan designs (e.g., safe harbor and/or prototype 401(k) plans) may limit the availability of adding a student loan benefit to a qualified plan. In addition, it remains to be seen how such programs will impact nondiscrimination testing – particularly since the group of employees benefitting would most likely be non-highly compensated. An employer interested in implementing a similar program should carefully consider existing plan provisions, workforce demographics and employer objectives.
Even if the student loan repayment program described in the PLR is not appropriate for all employers, it could draw much needed attention to other proposals in this area. For example, legislation to amend Code Section 127 to allow employers to repay an employee’s student loans on a tax-free basis through an education assistance program has been introduced in Congress on multiple occasions but has yet to be put to a vote. The issuance of the PLR could be the catalyst Congress needs to enact this or other legislation that would encourage the wider adoption by employers of student loan repayment programs.
If you’d like to explore the possibility of offering student loan benefits to your workforce, please contact our Employee Benefits group.