IRS Approves a Plan’s Design for Student Loan Repayment Benefits

A 401(k) plan sponsor requested and Internal Revenue Service (IRS) ruling that its proposal to amend the plan to provide student loan repayment (SLR) non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations.

In a Private Letter Ruling, the IRS explains that under the 401(k) plan, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period, the plan sponsor makes a matching contribution on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period.  The regular matching contributions are made each payroll period.

The plan sponsor proposes to amend the plan to offer a student loan benefit program, under which it would make an employer non-elective contribution on behalf of an employee conditioned on that employee making student loan repayments (SLR non-elective contribution). The program is voluntary—an 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.

Such an employee would be eligible to receive SLR non-elective contributions and true-up matching contributions, as appropriate. All employees eligible to participate in the plan will be eligible to participate in the student loan repayment program. If an employee initially enrolls in the program but later opts out of enrollment, then the employee will resume eligibility for regular matching 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). 

In order to receive either the SLR non-elective contribution or the true-up matching contribution, the employee would need to be employed with the plan sponsor on the last day of the plan year (except in the case of termination of employment due to death or disability). 

Both SLR non-elective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions. The SLR non-elective contribution will be subject to all applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing. The SLR non-elective contribution will not be treated as a matching contribution for purposes of any testing under or requirement of 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 plan sponsor said it has not extended and has no intention to extend any students loans to employees that will be eligible for the program.

What the IRS says

In this case, the IRS notes that 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.

In addition, 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. Therefore, the IRS concludes that the proposal to amend the plan to provide SLR non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6).

The agency says its ruling is based on the assumption that the plan sponsor will not extend any student loans to employees that will be eligible for the program. 

IRS Private Letter Rulings are directed only to the taxpayer requesting it. However, they can give retirement plan practitioners an idea of what the IRS thinks about plan sponsor decisions or programs.