IRS allows student loan repayments to be linked to 401(k)
The Internal Revenue Service has issued a private letter ruling allowing an unnamed employer to make 401(k) contributions on behalf of employees who are repaying their student loans.
The private letter ruling, which the IRS issued this month, does not set a precedent for other employers. However, it may open the door to allowing other employers to offering similar benefits to employees who are paying off their student loans, according to Bloomberg Law.
Tying the student loan repayments to 401(k) matches could provide an inducement for young employees to join a company or firm. PricewaterhouseCoopers is among a number of organizations offering student loan repayment benefits to employees (see PwC to reimburse up to $1200 a year for employees' student loan debt). Only about 4 percent of employers provide assistance in repaying student loan debt, according to a survey by the Society for Human Resource Management. However, a separate survey last year by the nonprofit American Student Assistance found that 86 percent of young employees said they would commit to stay with their employer for five years if it helped pay off their student loans.
Under the program described in the IRS private letter ruling on August 17, if an employee makes a student loan repayment during a pay period equal to at least 2 percent of the employee’s eligible compensation for the pay period, then the employer will make an student loan repayment nonelective contribution as soon as practicable after the end of the year equal to 5 percent of the employee’s eligible compensation for that pay period. The contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee doesn’t make a student loan repayment for a pay period equal to at least 2 percent of their eligible compensation, but does make an elective contribution during that pay period equal to at least 2 percent of the employee’s eligible compensation for that pay period, then the employer will make a matching contribution as soon as practicable after the end of the plan year equal to 5 percent of the employee’s eligible compensation for that pay period (known as a “true-up matching contribution”). In order to receive either the student loan repayment nonelective contribution or the true-up matching contribution, the employee would need to be employed with the employer on the last day of the plan year (except in the case of termination of employment due to death or disability). Both the student loan repayment nonelective contributions and the true-up matching contributions would be subject to the same vesting schedule as regular matching contributions.
The IRS approved the program in the case of that employer. “In the present case, SLR nonelective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement,” said the IRS. “Furthermore, 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. Therefore, with respect to your ruling request, we conclude that your proposal to amend the Plan to provide SLR nonelective contributions under the program will not violate the ‘contingent benefit’ prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6). This ruling is based on the assumption that Taxpayer will not extend any student loans to employees that will be eligible for the program.”