Employee Benefits-IRS Issues A PLR Discussing A Feature Added To A 401(k) Plan Under Which The Employer Can Make Contributions For Employees Paying Off Student Loans

The Internal Revenue Service (the “IRS”) has issued a Private Letter Ruling in which an employer proposes to amend its 401(k) plan in a manner which will help its employees accumulate moneys to pay off student loans.

In PLR 201833012 (dated August 17, 2018), the Internal Revenue Service (the “IRS”) was faced with the following proposed amendment to a 401(k) plan (the “Plan”).

An employer proposed to amend the Plan to offer a student loan benefit program (the “Program”).  Under the Program, the employer would make an employer nonelective contribution on behalf of an employee, conditioned on that employee making student loan repayments (the “SLR Nonelective 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 (401(k)) contributions to the Plan, but would not be eligible to receive regular matching contributions with respect to those elective contributions.  The employee would be eligible to receive SLR Nonelective Contributions and true-up matching contributions, as appropriate, as follows.

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 employer will make an SLR Nonelective 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 Nonelective 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 employer 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 (the “True-Up Matching Contribution”).  In order to receive either the SLR Nonelective Contribution or the True-Up Matching Contribution, the employee would need to be employed with the employer on the last day of the plan year (except in the case of termination of employment due to death or disability).

Both SLR Nonelective Contributions and True-Up Matching Contributions will be subject to the same vesting schedule as the Plan’s regular matching contributions.  The SLR Nonelective 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 Nonelective Contribution will not be treated as a matching contribution for purposes of any testing under or requirement of Code section 401(m).  The True-Up Matching Contribution will be included as a matching contribution for purposes of any testing under or requirement of Code section 401(m).  The employer has not extended, and has no intention to extend, any students loans to employees that will be eligible for the Program.

The Taxpayer which requested the Private Letter Ruling, and proposes to amend its 401(k) plan as stated above, asked the IRS to rule that the SLR Nonelective 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.  Under this prohibition, no employer provided benefit can be conditioned on an employee’s making (or refraining from making) elective contributions to a 401(k) plan.  The Private Letter Ruling did conclude that the proposed amendment would not result in a violation of this prohibition, since the SLR Nonelective Contributions depend on student loan repayments, not elective contributions.

As such, this Private Letter Ruling provides a possible method by which an employer can help employees repay student loans.  However, the Private Letter Ruling says that it is not addressing any Code section 401(a) issue, other than the contingent benefit prohibition on which the Taxpayer requested a ruling.  The Ruling itself indicates that the SLR Nonelective Contributions must satisfy all applicable plan qualification requirements, such as eligibility, vesting, distribution rules, contribution limits, and coverage and nondiscrimination testing.  Further, the Private Letter Ruling stated that it is not considering the tax consequences of the proposed amendment.

Thus, an employer should be careful prior to adopting this proposed amendment, or a similar amendment, for its own 401(k) plan, and makes sure it understands all issues involved.