IRS Approves Student Loan Repayment Benefit in 401(k) Plan

In a Private Letter Ruling released on August 17, 2018 (PLR 201833012) (“Ruling”), the IRS approved an employer’s proposed amendment to its 401(k) plan (“Plan”), under which it would make an employer non-elective contribution on behalf of an employee conditioned on the employee making student loan repayments (“SLR non-elective contribution”).

As described in the Ruling, the proposed student loan repayment benefit program (the “program”), is a voluntary program under which the employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the Plan but would not be eligible to receive regular matching contributions with respect to those elective contributions. Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then the plan sponsor will make an SLR non-elective 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 non-elective 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 the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee’s eligible compensation for that pay period, then the Plan sponsor will make a matching contribution as soon as practicable after the end of the Plan year equal to 5% of the employee’s eligible compensation for that pay period (true-up matching contribution).

As further described in the Ruling, the employer requested confirmation whether its proposed amendment to the Plan would violate the “contingent benefit” rule under Code Section 401(k)(4)(A) and related regulations. Section 401(k)(4)(A) provides in pertinent part that:  “A cash or deferred arrangement of any employer shall not be treated as qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.” 

In the current case, the IRS reasoned that the SLR non-elective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement. The IRS further noted that because an employee who makes student loan repayments and thereby receives SLR non-elective contributions is still permitted to make elective contributions, the SLR non-elective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. Accordingly, the IRS concluded that the proposed program would not violate the “contingent benefit” rule.

While an IRS Private Letter Ruling is directed only to the taxpayer requesting it, the Ruling could open the door to employers considering similar programs.

Michael Poland is an associate in the North America Executive Compensation and Employee Benefits Practice Group. He routinely advises companies on various executive compensation and employee benefits matters, as well as employee benefit aspects of mergers and acquisitions. Mr. Poland advises clients on the design, implementation and operation of tax-qualified retirement plans, welfare benefit plans and nonqualified plans. He assists clients with all aspects of regulatory compliance with the Internal Revenue Code, ERISA and COBRA. Additionally, he advises clients on ERISA's fiduciary and prohibited transactions provisions. Mr. Poland also represents clients in plan qualification and other issues related to the IRS. He serves as a volunteer advising attorney for the Center for Disability and Elderly Law and is a regular contributing author to Corporate Taxation.