According to a recent report, the average student loan debt for a Class of 2016 graduate is $37,172. As recent graduates enter the work force, they often choose not to contribute to their employers' 401(k) plans and lose out on corresponding employer match because they prefer to focus on paying off their student loans or simply can't afford to pay off loans and put away money for retirement at the same time. In turn, those recent graduates often don't view a company's 401(k) plan as providing a true benefit to them.
What if there was a way to allow those recently graduated employees to continue repaying their loans and still share in company 401(k) plan contributions? According to an IRS private letter ruling released this month, it looks like there's a way to do just that.
In Private Letter Ruling 201833012 (the "PLR"), a company requested IRS approval of a new 401(k) plan student loan repayment "match" program. Specifically, the company proposed making an annual employer nonelective contribution equal to 5 percent of an employee's pay to a 401(k) plan – if the employee made student loan payments during the year of at least 2 percent of the employee's pay. The company's primary legal concern with this program was whether it would violate the so-called contingent benefit rule under the Internal Revenue Code That rule generally prohibits an employer from conditioning benefits outside of a 401(k) plan on participation in the 401(k) plan.
In the PLR, however, the IRS held that the student loan repayment match program would not violate the contingent benefit rule, in relevant part because:
- The student loan repayment match program was voluntary;
- Employees participating in the student loan repayment match program were still eligible to make 401(k) contributions (although they were not eligible for regular match); and
- Receipt of the employer nonelective contribution was conditioned on whether the employee made the required level of student loan repayments, not on whether he or she contributed to the 401(k) plan.
While this PLR is generating a lot of interest, employers need to do their homework before proceeding with this type of program. In particular, employers should be aware that:
- While a PLR gives us a good sense of how the IRS would view a particular arrangement, only the company that requests a private letter ruling can rely on that ruling. This means that there will be at least some uncertainty with any program that differs in design from the program approved under the PLR.
- The PLR does not address the student loan repayment match program's compliance with nondiscrimination requirements under the Internal Revenue Code or even which nondiscrimination requirements would apply. These could be very tricky issues and could result in the cost and administrative burden of extra testing for a program that might only benefit a small number of employees.
- The program design contemplated in the PLR would not work under a 401(k) plan with a safe harbor match.
With these uncertainties in mind, employers will want to consult with legal counsel to determine whether any proposed program would comply with the law and with their plan recordkeepers to ensure that a proposed program is workable from an administrative and nondiscrimination testing standpoint.
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