IRS Issues Guidance on Tying Certain Retirement Plan Contributions to Employees’ Student Loan Repayments:

On August 17, 2018, the IRS released Private Letter Ruling 201833012 (the “PLR”). The party that requested the PLR is a 401(k) plan sponsor. Under that entity’s plan, if an employee makes an elective deferral equaling at least 2% of his or her eligible compensation (which is the plan’s minimum permitted elective deferral), the plan sponsor makes a regular matching contribution equal to 5% of the employee’s eligible compensation during each applicable pay period. The plan sponsor wishes to amend the plan as follows:

• The plan will offer a student loan benefit program (the “Program”). Under the Program, the plan sponsor will make an employer nonelective contribution on behalf of employees.
• That nonelective contribution (the “SLR contribution”) will be conditioned on each employee making student loan repayments under the Program.
• While an employee participates in the Program, he or she will still be eligible to make elective deferrals but will not be eligible to receive regular matching contributions with respect to those elective deferrals.
• All employees eligible to participate in the plan will be eligible to participate in the Program.
• If an employee enrolls in the Program but later opts out of the Program, he or she will resume eligibility for regular matching contributions.
• If an employee makes a student loan repayment under the Program during a pay period that equals at least 2% of the employee’s eligible compensation for that period, then the plan sponsor will make an SLR 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 contribution would be made without regard to whether the employee makes any elective deferrals for the applicable year.
• If an employee does not make a student loan repayment (while enrolled in the Program) for a pay period equal to at least 2% of the employee’s eligible compensation, but does make an elective deferral 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 (i.e. a true-up matching contribution).
• In order to receive either the SLR nonelective contribution or the true-up matching contribution, an employee will need to be employed with the plan sponsor on the last day of the applicable plan year (except in the case of employment termination resulting from death or disability).
• SLR contributions and true-up matching contributions will be subject to the same vesting schedule as the plan’s regular matching contributions.
• SLR contributions will be subject to all applicable plan qualification requirements (e.g., eligibility, vesting, distribution, contribution limits, and coverage and nondiscrimination testing). Also, although SLR contributions will not be treated as a matching contribution for purposes of Internal Revenue Code (the “Code”) Section 401(m), the true-up matching contribution will be included as a matching contribution for purposes of Code Section 401(m).

Under those facts, the IRS ruled that SLR contributions under the Program will be conditioned on whether an employee makes a student loan repayment during an applicable pay period, rather than conditioned on an employee making elective deferrals under the plan. Therefore, the proposed amendment will not violate the Code’s “contingent benefit” rule in Section 401(k)(4)(A). Under that rule, a cash or deferred arrangement is not treated as a qualified cash or deferred arrangement if any other benefit is conditioned on the employee making elective deferrals. (That rule does not apply to matching contributions made with respect to an employee’s elective deferrals.) The IRS also noted that its ruling is based on the assumption that the plan sponsor will not extend any student loans to employees who will be eligible for the Program.

This guidance may be welcomed by 401(k) plan sponsors wishing to help employees pay their student loan debts (which have increased significantly in the U.S. over the past decade) and simultaneously save money for retirement. That should prove helpful to many employees who cannot afford to make their required student loan payments and to make elective deferrals to a 401(k) plan.

However, questions remain. For example, what steps should plan sponsors take to substantiate that a participant in the Program is making the Program’s required student loan repayments? Also, will this plan design be proper for plans that use design-based safe harbors requiring all eligible employees to receive specific minimum contributions? Hopefully, additional IRS guidance will provide more details.

Finally, although the PLR properly states that is directed only to the plan sponsor that requested it and that the PLR cannot be used as precedent, it does give 401(k) plan sponsors an idea of the IRS’s current position on this topic.

Here is a link to the PLR:  https://www.irs.gov/pub/irs-wd/201833012.pdf