Benefits and Compensation

IRS Ruling Seen Opening Employer Plan Options for Student Loan Repayment Benefits

The Internal Revenue Service (IRS) released a private letter ruling (PLR) on August 17 that appeared to give the go-ahead to an employer-sponsored student loan repayment benefit offered through the company’s 401(k) plan.

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PLR 201833012 confirmed that, under certain circumstances, plan sponsors may be able to link employer contributions made on behalf of a 401(k) plan participant to the amount of student loan repayment made by the employee outside the retirement plan. The letter, issued to the unidentified requesting employer on May 22, may not be relied upon as precedent by other taxpayers because it is binding only for the IRS and the requesting taxpayer,

The approach described in the PLR gives participants tax advantages like those associated with traditional tuition-reimbursement benefits but generally denied to student loan repayment benefits.

‘Contingent Benefit’ Prohibition

In response to the employer’s query, the PLR said making student loan repayments through the employer’s contributions to the 401(k) accounts of employees who are repaying student loans “would not violate the ‘contingent benefit’ prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6)” of the federal tax code.

“This ruling is important because many employers have been looking for ways to help their employees manage student loan repayment obligations, but to date the options available for doing so have been rather limited,” said McDermott Will & Emery employee benefits attorneys Jeffrey Holdvogt and Sarah Engle in a client bulletin posted the day of the PLR release.

In the last 10 years, U.S. student loan debt has soared, with some studies placing it at about $1.3 trillion. As a result, managing this has become a burden to more employees—both recent graduates and older workers who may carry their own long-term debt or children’s loan obligations—that may deter some from saving for retirement.

The PLR responds to an August 2017 request from a defined contribution (DC) retirement plan that asked the agency for a compliance ruling on its proposed plan amendment to provide nonelective contributions for student loan repayment.

Specifically, the IRS concluded in the PLR that the employer could make the desired nonelective contribution to its 401(k) plan if the amount of the contribution is based on an employee’s total student loan repayments and would be contributed to the plan in lieu of the matching contributions that otherwise would be made to the plan, had the employee made pretax, Roth (after-tax), or other after-tax contributions. The employee is still allowed to make pretax or Roth salary deferrals into his or her 401(k), but that is not required to be a part of the student loan repayment benefit.

The student loan repayment benefit outlined in the PLR included these main features:

  • Employee participation is voluntary;
  • The traditional employer matching contribution to the participant’s retirement account is replaced with this payment toward a student loan;
  • If an employee makes a student loan repayment during a pay period that equals at least 2 percent of compensation for the period, the employer will make a student loan repayment nonelective contribution equal to 5 percent of compensation for the same period; and
  • The benefit is subject to coverage and nondiscrimination testing, as well as other requirements for a qualified retirement plan such as contribution limits, eligibility, vesting, and distribution rules.

‘Arguably Closer to Cost-Neutral’

The McDermott bulletin called the nonelective contribution toward student loan repayment approved in the PLR “arguably closer to cost-neutral [for the plan sponsor] than most other student loan benefit programs” because it essentially offsets any matching contribution an employee would otherwise be eligible to receive under the retirement plan. Some direct student loan repayment benefits require issuing employees an additional, taxable amount beyond 401(k) matches to help pay down the loan.

“Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, the PLR will very likely cause many employers, particularly employers with a young and educated workforce, to consider offering” such a benefit in their retirement program, the McDermott lawyers wrote.

However, the law firm warned that some plans’ special rules that apply to safe harbors or design elements beyond those discussed in the recent PLR could limit an employer’s ability to create a similar student loan benefit.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.