IRS Okays Amending a 401(k) Plan to Include a Student Loan Benefit Program

By John Iekel • August 21, 2018 • 0 Comments
The IRS has said that a 401(k) plan can be amended to include a student loan benefit program.

In private letter ruling (PLR) 201833012, dated May 22 and released Aug. 17, the employer in question had asked the IRS for a ruling on whether its proposal to amend the plan to provide student loan repayment (SLR) nonelective contributions under the program would violate the “contingent benefit” prohibition of Code Section 401(k)(4)(A) and Treas. Reg. §1.401(k)-1(e)(6).

The Program

In general, the program will enable full-time and part-time employees who qualify for the company's 401(k) – and who are also contributing 2% of their eligible pay toward student loans – to receive an amount equivalent to the company's traditional 5% "match" deposited into their 401(k) plans. Program recipients will receive the match without requiring any 401(k) contribution of their own. All employees eligible to participate in the 401(k) plan will be eligible to participate in the student loan benefit program and may opt out later on a prospective basis. If an employee participates in the program, she or he would still be eligible to make elective contributions to the 401(k) plan. However, the employee would not be eligible to receive regular matching contributions from the employer as long as she or he participates in the student loan benefit program; if he or she later opts out, that employee will then again be eligible for regular matching contributions. Under the student loan benefit program, if an employee makes a student loan repayment during a pay period equal to at least 2% of his or her eligible compensation for the pay period, then the employer will make an SLR nonelective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR nonelective contribution is made without regard to whether the employee makes any elective contribution throughout the year.

If an employee participates in the program, she or he would still be eligible to make elective contributions to the 401(k) plan. However, the employee would not be eligible to receive regular matching contributions from the employer as long as she or he participates in the student loan benefit program; if he or she later opts out, that employee will then again be eligible for regular matching contributions. An employee participating in the program would be eligible to receive SLR nonelective contributions and a matching contribution from the employer as soon as practicable after the end of the plan year equal to 5% of the employee’s eligible compensation for that pay period (a true-up matching contribution).

Under the student loan benefit program, if an employee makes a student loan repayment during a pay period equal to at least 2% of his or her eligible compensation for the pay period, then the employer will make an SLR nonelective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR nonelective contribution is made without regard to whether the employee makes any elective contribution throughout the year.

If the employee does not make a student loan repayment for a pay period equal to at least 2% of her or his eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of eligible compensation for that pay period, then the employer will make a true-up matching contribution.

In order to receive either the SLR nonelective contribution or the true-up matching contribution, the employee would need to be employed by the employer on the last day of the plan year (unless the employment ends due to death or disability). Both SLR nonelective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions.

The SLR nonelective contribution will be subject to all applicable 401(k) plan qualification requirements, including, but not limited to:

  • eligibility, vesting and distribution rules;

  • contribution limits; and

  • coverage and nondiscrimination testing.

The SLR nonelective contribution will not be treated as a matching contribution for purposes of any testing under or requirement of Code Section 401(m). The true-up matching contribution will be included as a matching contribution for purposes of any testing under, or requirement of, Section 401(m).

The IRS Response

In this case, the IRS said, SLR nonelective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned — either directly or indirectly — on the employee making elective contributions under a cash or deferred arrangement. Furthermore, since an employee who makes SLRs and thereby receives SLR nonelective contributions still may make elective contributions, the SLR nonelective contribution is not conditioned on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.

Therefore, the IRS said, it concluded that the proposal to amend the 401(k) plan to provide SLR nonelective contributions under the program will not violate the “contingent benefit” prohibition of Section 401(k)(4)(A) and Treas. Reg. §1.401(k)-1(e)(6).

A Caveat

An IRS PLR is an expression of the IRS’ take on a particular situation and set of circumstances, their implications and how the rules apply in that situation. They are not regulations, formal guidance or precedent. PLRs do, however, provide some indication as to how the IRS regards certain activities and situations.

On her “E is for ERISA” blog, ERISA attorney Christine P. Roberts acknowledges that the PLR “is only citable authority for the taxpayer who requested the ruling,” but still calls it “a promising development on the retirement plan front given the heavy student loan debt carried by current millennial employees and the generations following them.” Jeffrey Holdvogt and Sarah Engle of McDermott Will & Emery agree, noting that the increase in student loan debt is making employer-provided student loan assistance increasingly important to employees.

The student loan benefit program in question, says Roberts, “solves the problem of low 401(k) plan participation by employees who are carrying student loan debt, allowing them to obtain the ‘free’ employer matching funds that they would otherwise forego.” And Holdvogt and Engle argue that the PLR will give added impetus to such programs, since they contend that the PLR “will help clear the way for these companies to offer a new type of student loan benefit as part of their 401(k) plans.”