The IRS has approved an arrangement under which an employer “matches” employee student loan repayments by making non-elective contributions to its 401(k) plan on behalf of the employees paying the loans. The guidance is in the form of a Private Letter Ruling (PLR 201833012) that is only citable authority for the taxpayer who requested the ruling, but it is a promising development on the retirement plan front given the heavy student loan debt carried by current millennial employees and the generations following them. The program described in the ruling 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.
The employer who obtained the ruling maintained a 401(k) plan that included a generous matching formula – 5% of eligible compensation for the pay period, provided that the employee made an elective deferral of at least 2% of compensation for the pay period. The employer proposed establishing a “student loan repayment (SLR) nonelective contribution” program with the following features:
• It would be completely voluntary; employees must elect to enroll;
• Once enrolled, employees could opt out of enrollment on a prospective basis;
• Enrollees would still be eligible to make pre-tax or Roth elective deferrals, but would not be eligible to receive regular matching contributions while enrolled;
• Employees would be eligible to receive “SLR nonelective contributions” and true-up matching contributions, as described below; and
• If an employee initially enrolls in the program but later opts out of enrollment, the employee will resume eligibility for regular matching contributions.
SLR Nonelective Contributions
• If an employee makes a student loan repayment during a pay period that equals at least 2% of compensation for the pay period, the employer will make an SLR nonelective contribution equal to 5% of compensation for the pay period.
• Although based on each pay period’s compensation, the collective SLR nonelective contribution will be made as soon as practicable after the end of the plan year. (Because employees may stop and restart student loan repayments or regular elective deferrals, presumably it would not be possible for an employer to know, before the end of the plan year, precisely how much SLR nonelective contributions, and catch-up contributions, each program participant is due.)
• The SLR nonelective contribution is made regardless of whether or not the employee makes any regular salary deferrals throughout the year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the SLR nonelective contribution.
• The SLR nonelective contributions are subject to the same vesting schedule as regular matching contributions.
• The SLR nonelective contributions are subject to all applicable plan qualification requirements: eligibility, vesting, distribution rules, contribution limits, and coverage and nondiscrimination testing.
• The SLR nonelective contributions will not be treated as a regular matching contribution for purposes of 401(m) testing.
• In the event an 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 a regular elective deferral equal to at least 2% of compensation, the employer will make a “true-up matching contribution” equal to 5% of the employee’s eligible compensation the pay period.
• Although based on pay period compensation, the collective true-up matching contribution will be made as soon as practicable after the end of the plan year.
• The employee must be employed on the last day of the plan year (other than when employment terminates due to death or disability) in order to receive the true-up matching contribution.
• The true-up matching contributions are subject to the same vesting schedule as regular matching contributions.
• The true-up matching contributions are treated as regular matching contributions for purposes of 401(m) testing.
The specific ruling that the IRS made was that the SLR nonelective contribution program would not violate the prohibition on “contingent benefits” under applicable Income Tax Regulations. Under this rule, an employer may not make other benefits, such as health insurance, stock options, or similar entitlements, contingent on a participant’s making elective deferrals under a 401(k) plan. There are a few exceptions, most notably employer matching contributions, which are expressly contingent on elective deferrals. Because the SLR nonelective contributions are triggered by employees’ student loan repayments, and not by elective deferrals, and because employees who receive them are still eligible to make regular elective deferrals, the IRS concluded that they did not violate the contingent benefit rule. The IRS stated that, in reaching this conclusion, it presumed that the taxpayer had not extended any student loans to employees who were eligible for the program and had no intentions to do so.
Existing vendors who help employers contribute towards student loan repayments will probably move to establish and market versions of the SLR nonelective contribution program described in the private letter ruling, in which case additional, and more broadly applicable, IRS guidance would be welcome. In the meantime, employers wishing to put such a program in place should not assume that reproducing the facts in the ruling is a safe harbor from adverse tax consequences, and should consult legal counsel to assess potential liability.