Recent IRS Guidance Provides Options for Employers in Addressing Employee Student Loan Debt While Helping Employees Save for Retirement
On August 17, 2018, the Internal Revenue Service (IRS) published a private letter ruling to address an employer’s ability to provide a student loan repayment benefit in its 401(k) plan.
In the ruling, the IRS authorized an employer’s proposed amendment to its 401(k) plan which provided for employer student loan repayment nonelective contribution (“SLR nonelective contribution”) on behalf of an employee who makes student loan payments. The employer’s SLR nonelective contributions would replace the generally applicable matching contributions available under the plan and would not be conditioned on an employee’s elective contributions to the 401(k) plan, but were instead conditioned on the employee’s student loan payments made during the pay period. The program contained the following distinguishing features:
- Voluntary. Employees were required to affirmatively elect enrollment, and once enrolled, an employee could opt out prospectively.
- Continued elective deferrals. Employees participating in the program could still make elective contributions to the 401(k) plan. However, the employee would not be eligible to receive regular matching contributions on those elective contributions in addition to the SLR nonelective contributions.
- Eligibility. All employees eligible to participate in the 401(k) plan were eligible to participate in the student loan repayment program.
- Resumption of regular matching contributions. If or when an employee opted out of the student loan repayment program, the employee would again become eligible for regular matching contributions.
- SLR nonelective contributions. If an employee made a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, the employer would make a SLR nonelective contribution after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR nonelective contribution would be made regardless of whether the employee made any elective contributions throughout that year.
- Vesting. The SLR nonelective contributions were subject to the same vesting schedules as regular matching contributions.
For many younger employees, paying down student debt may be a higher priority (and a more valuable “benefit”) than saving for retirement. The IRS’s ruling demonstrates, at the very least, that the IRS is considering ways to help employers address student loan debt issues in a tax-advantageous method while permitting employees to save for retirement. In other words, if an employer were to pay an employee cash to repay a student loan, such a payment would be taxable income to the employee. Under a 401(k) plan as described above, however, the employer’s SLR nonelective contribution is not taxable to the employee and can continue to grow tax-free until the employee’s retirement.
Importantly, the actual contribution percentage (ACP) tests for nondiscrimination must continue to be met, and the student loan repayment arrangement could have an adverse effect on the ability to satisfy the ACP test. Therefore, it may be difficult to implement in smaller plans.
While an IRS private letter ruling cannot be relied upon as guidance by any taxpayer other than the one who requested the ruling, employers can use this ruling as an indicator of the IRS’s position on the issue.