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A New Perspective on Student Loan Repayment Benefits

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On August 17, 2018, the Internal Revenue Service (the “Service”) published a Private Letter Ruling (the “PLR”) describing a unique student loan repayment program in the context of a qualified retirement plan.

Proposed Student Loan Repayment Program

As described in the PLR, an Employer sponsors a Section 401(k) defined contribution plan that permits elective deferrals. The plan requires the Employer to make a matching contribution equal to 5% of an eligible employee’s compensation for a given pay period if such employee makes an elective contribution of at least 2% of his or her compensation during the same period.

The Employer proposed to amend the plan to incorporate a student loan repayment program (the “Program”). Under the Program, the Employer would make a non-elective contribution equal to 5% of an eligible employee’s compensation for a given pay period provided that such employee made student loan payments of at least 2% of his or her compensation during the same period.  Participation in the Program would be voluntary and an employee may opt in or out at any time.  An employee who participates in the Program may still make elective contributions, but will be ineligible for traditional matching contributions otherwise available under the plan.  Participants must be employed with the Employer on the last day of the plan year to receive a non-elective contribution under the Program.

The non-elective contribution is subject to all eligibility, vesting, distribution rules, as well as contribution limits and coverage and nondiscrimination testing. The non-elective contribution is not treated as a matching contribution for purposes of nondiscrimination testing.

Contingent Benefit Rule

The PLR addresses specifically the application of the “contingent benefit rule” to the Program. In general, the contingent benefit rule provides that benefits (other than matching contributions) must not be contingent on an employee’s decision to make or not to make an elective contribution.  The PLR indicates that the Program does not violate the contingent benefit rule because the non-elective contributions available under the Program are not conditioned on whether an employee makes or does not make an elective contribution.  Rather, the benefit under the Program is available only if the employee makes the required student loan payment during a given period.  Moreover, the Program does not prohibit a participating employee from making elective contributions under the plan.

Further Guidance

Private letter rulings are not binding authority and may only be relied on by the taxpayer that requested the ruling. In light of this limitation, several prominent industry groups have requested that the Service issue guidance formalizing the view expressed in the PLR.  Employers may consider amending their plans in light of potentially forthcoming guidance.