August 27, 2018
Benefits Law Alert
Author(s): Eric Paley
The IRS recently approved an employer’s proposal to offer a “student loan repayment nonelective contribution” under its 401(k) plan. The ruling provides welcome guidance to plan sponsors seeking to provide employees with the opportunity to save for retirement while repaying their student loans. This alert discusses what employers and benefits plan sponsors need to know.
Employers and employees alike acknowledge that the burden of student loan repayment often derails employee retirement savings. Student loan repayment benefits have emerged as attractive hiring and retention tools, but these benefits have historically been taxable to employees and done little to uplift lagging 401(k) deferral rates.
In a private letter ruling issued on August 17, 2018,[1] the IRS approved an employer’s proposal to offer a “student loan repayment nonelective contribution” under its 401(k) plan. Although it cannot be relied upon as binding legal authority by parties other than the employer that requested it, the ruling provides welcome guidance to plan sponsors seeking an innovative and cost-effective way to provide employees with the opportunity to save for retirement on a tax-deferred basis while repaying their student loans. As set forth in further detail below, the ruling sets forth specific criteria that the IRS found relevant in approving the proposed nonelective contribution. The ruling also signals that other types of student loan repayment benefits may be permissible under retirement plans. Plan sponsors should carefully review the ruling and other IRS guidance when considering plan amendments to provide student loan repayment benefits.
The unidentified plan sponsor maintains a 401(k) plan, which provides an employer matching contribution equal to 5% of an eligible employee’s compensation if the employee elects to defer at least 2% of his or her compensation to the plan on a pre-tax basis. The plan sponsor requested a ruling as to whether amending the plan to provide a nonelective employer contribution conditioned upon an employee’s student loan repayment would violate what is known as the “contingent benefit” prohibition.[2] The contingent benefit prohibition generally precludes a 401(k) plan from conditioning benefits (other than matching contributions) upon an employee’s election to defer a percentage of his or her compensation to the plan in lieu of receiving that compensation as taxable wages. The IRS approved the proposed nonelective contribution structure, which contained the following features:
In finding that the nonelective contribution structure did not violate the contingent benefit prohibition, the IRS noted that the nonelective contribution was conditioned on an employee making student loan payments outside of the plan (rather than being conditioned on the employee making elective deferrals). The IRS also found relevant the fact that employees could still make elective deferrals to the plan while participating in the student loan repayment contribution program. This meant the nonelective contribution was not conditioned upon employees having to choose between the employer making or not making contributions for them under the program in lieu of regular taxable wages.
While the private letter ruling should provide plan sponsors comfort to move forward with adopting a student loan repayment contribution program, several unanswered questions remain:
Plan sponsors who want to explore or adopt student loan repayment benefits that differ materially from the student loan repayment nonelective contribution outlined in the August 17, 2018 private letter ruling should consult with legal counsel to ensure that the benefits will not interfere with plan qualification requirements.
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