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.
To read the full advisory on the Kelley Drye website, click here.