In a recent Private Letter Ruling (PLR 201833012), the IRS confirmed that an employer could make nonelective contributions to a 401(k) plan intended to “match” the participant’s student loan repayments. In effect, the employer makes 401(k) matching contributions based on student loan repayments in lieu of 401(k) deferrals. With many employees burdened by student loans, the ability to save for retirement while paying down student debt could provide a powerful recruitment tool and engage employees in the 401(k) plan early in employment.
The student loan repayment (“SLR”) arrangement the IRS approved in the PLR treats participants’ student loan repayments as if they were employee deferrals and applies the plan’s employer matching formula to the amount of those repayments. Employees who enroll in the SLR program can still choose to make salary deferrals to the 401(k) plan, but those salary deferrals will not be matched unless it would yield a higher total employer contribution than the SLR match. The SLR match is not included in matching contributions for purposes of ACP (401(m)) testing, but it would otherwise be subject to 401(k) and other plan testing rules.
While this PLR appears to offer a new design opportunity, it is important to note that a Private Letter Ruling (PLR) can be relied on only by the taxpayer requesting the letter and is limited to the specific arrangement described in it. It took the taxpayer a year to get this PLR issued. Employers interested in pursuing their own SLR program will need to work with their legal counsel to decide whether to apply for their own ruling. This will be especially important for any arrangement that differs from the arrangement described in the PLR. Employers using prototype or volume submitter plans should be extremely careful to make sure that any adoption of such an arrangement will not convert their prototype or volume submitter plan into an individually-designed plan. For some employers, such an arrangement may not be advisable until the prototype or volume submitter sponsor has obtained its own IRS approval.
It is hoped that the IRS will consider issuing regulations or guidance that can be relied upon generally by all 401(k) plans.
Employers who adopt an SLR arrangement will need to establish additional administration and recordkeeping processes, including a method to confirm that student loan repayments were in fact timely paid to third parties.
Employers wishing to explore this possibility should consult with legal counsel to explore the pros and cons.