The IRS has released a Private Letter Ruling (“PLR”) 201833012, in which it approved a student loan repayment program as a 401(k) benefit. Although the PLR can only be applied by the taxpayer/plan sponsor requesting it, it is a promising development for employers seeking to provide stronger incentives for a workforce increasingly saddled with student loan debt.

The PLR allows student loan payments made by employees to be treated as if they were 401(k) elective contributions which are matched by the employer. The 401(k) student loan repayment (“SLR”) benefit effectively gives employees with significant student loan debt an opportunity to participate in the 401(k) Plan and receive matching retirement funds without requiring compensation deferrals.

The approved design was part of a 401(k) Plan that already provides employees the opportunity to make pre-tax, Roth, and after-tax elective deferral contributions. The employer provides matching contributions equal to 5% of the employee’s compensation for each pay period an employee’s elective contribution equals 2% or more of eligible compensation for the pay period. The SLR benefit, proposed as a plan amendment, provides a nonelective employer matching formula with the following features:

  • Participation is voluntary.
  • Any participant who makes a student loan payment equal to 2% or more of eligible compensation for a pay period is eligible to receive non-elective employer contributions equal to the amount of matching contribution that would have been provided had an elective deferral been made.
  • The SLR benefit replaces employer matching contributions for those participating in the program. Thus, any elective deferrals made while participating in the SLR program would not be eligible for matching contributions.
  • SLR contributions are subject to the plan qualification requirements such as vesting, coverage and nondiscrimination testing, contribution limits, and eligibility and distribution rules; however, SLR benefits are not considered a regular matching contribution for 401(m) testing purposes.
  • The Plan Sponsor does not and will not provide student loans to participants.

The IRS found that this particular arrangement does not violate the “contingent benefit rule” under applicable Treasury regulations. The contingent benefit rule generally prohibits employers from making benefits conditional upon participant elective deferral contributions to a qualified cash or deferred arrangement under a Code § 401(k) plan. The SLR nonelective contribution benefit did not violate the rule because benefits are conditioned on student loan repayments instead of elective deferrals, and participation in the SLR program does not impact participants’ ability to make elective deferrals.

As a reminder, PLRs are only binding on those taxpayers requesting rulings and are limited to specific arrangements proposed by them.