One of the clear trends in employee benefits involves companies offering assistance with their workforce's student loan repayments. The reasons are obvious. Student loan debt is now the largest source of consumer debt after housing and that will likely be the case for the foreseeable future. This financial insecurity has a clear link to workplace productivity. In addition, companies are using student debt repayment incentives as recruitment tools for millennial workers. However, because these benefits were historically not offered on a tax-favored basis, the appeal was limited.
The IRS in a recent private letter ruling opened the door to a potential new incentive – the ability to offer a 401(k) "match" tied to an employee's student loan repayments. Private letter rulings are not binding on anyone but the taxpayer seeking the ruling, so the private letter ruling cannot be relied on by other taxpayers looking to offer a similar program. This is especially true for this particular ruling given how narrow the scope of the ruling is and the number of outstanding questions it raises. Nonetheless, the private letter ruling has generated a lot of discussion on retirement plan design.
The private letter ruling was requested by an employer that maintains a traditional 401(k) plan with a regular matching contribution equal to 5 percent of the participant's compensation per pay period if the participant made an elective contribution to the 401(k) plan of at least 2 percent of his or her compensation. The employer desired to amend its plan to add a new student loan repayment benefit program. The key terms of their program are as follows:
- The employer would make a non-elective contribution on behalf of participants in the program who made student loan repayments. If a participant made a student loan repayment of 2 percent of compensation, then the employer would make a non-elective contribution to the 401(k) plan equal to 5 percent of the employee's compensation.
- Participants in the program would not be eligible to receive the regular matching contribution for any elective deferrals to the 401(k) plan while participating in the program.
- The employer would also have a "true-up" matching contribution at the end of the year if the participant did not make a student loan repayment during a pay period but did make elective contributions to the 401(k) plan.
- The non-elective contribution and "true-up" matching contribution would be subject to the same vesting schedule as the regular matching contribution.
The employer requested a ruling that the program would not violate the "contingent benefit" rule under Code Section 401(k)(4)(A). The contingent benefit rule prohibits a 401(k) plan from conditioning any benefits (other than matching contributions) on the participant making an elective contribution. The IRS granted the ruling agreeing that the program would not violate the contingent benefit rule because the program was conditioned on the participant making a student loan repayment, not an elective contribution.
While this ruling is welcome for employers seeking creative 401(k) plan designs, it leaves open a number of practical questions an employer will need to consider before implementing a similar student loan repayment program. Some of the issues to consider are:
- How will coverage and nondiscrimination testing apply to such programs? Depending on the industry, the employees who would likely participate in a student loan repayment program include a mix of both highly compensated employees and non-highly compensated employees.
- Is such a program available to a safe harbor 401(k) plan?
- How would the employer substantiate that the student loan repayments were made? The easiest mechanism to substantiate would be if the employer directly paid the student loan provider through a payroll system, but this approach can be burdensome operationally.
Given these outstanding issues, companies that are interested in offering a similar program should work closely with benefits counsel to make sure the program is right for the company and administratively feasible.