IRS Allows Student Loan Benefit in 401(k) Plan
Author: Robert S. Teachout, XpertHR Legal Editor
September 4, 2018
In a private letter ruling (PLR), the Internal Revenue Service (IRS) approved an employer's proposed program to add a student loan benefit to its 401(k) plan. The employer will make matching contributions to its 401(k) plan for employees who make student loan repayments. The program would be voluntary and an employee could opt-out after enrolling.
Employers should keep in mind that PLRs are directed only to the employer requesting them and may not be cited as precedent. However, this PLR does give insight on how the IRS may approach this topic in the future.
The employer currently makes a 5% nonelective contribution when employees make elective contributions equal to at least 2% of their compensation. Under its proposal, for each pay period in which an enrolled employee makes student loan repayments equal to at least 2% of his or her compensation, the employer will make the same matching 5% contribution.
In pay periods during which an employee does not make a student loan repayment, he or she can still make a contribution to his or her 401(k) plan account, which is eligible for the employer match. Furthermore, employees who make a qualifying student loan repayment in a pay period additionally may make an elective contribution to their accounts, but the additional contribution would not be eligible for the company's match.
In its ruling, the IRS said that, as outlined, the unnamed company's plan would not violate rules prohibiting "contingent benefits" - benefits conditioned on an employee electing to make (or not make) contributions in lieu of receiving cash. Making benefits conditional affects a 401(k) plan's preferential tax status.
The IRS ruling noted that the proposed SLR nonelective contributions were conditioned on making student loan payments and not conditioned on making elective contributions. Moreover, "because an employee who makes student loan repayments and thereby receives SLR nonelective contributions is still permitted to make elective contributions, the SLR nonelective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash."
The PLR noted that the changes in the employer's 401(k) plan are permissible based on the assumption that employer will not extend any student loans to employees that will be eligible for the program.
When employers offer a benefit giving student loan repayment dollars directly to employees, those payments are treated as taxable income, whereas employer 401(k) contributions are not taxable. The employer's proposed approach would provide employees some of the tax advantages associated with traditional tuition-reimbursement benefits that are generally denied to student loan repayment benefits.