IRS Approves Request for 401(k) Plan-related Student Loan Benefit Program

The IRS recently released a letter in response to and in favor of an employer’s proposal to amend its plan to offer a student loan benefit program.  

Most employers today offer employees retirement plans allowing pretax contributions, such as 401(k) Plans, and have been looking for ways to assist their employees with addressing student loan debt.  Under this proposal, employers are permitted to make a nonelective contribution to employees’ defined contribution plans, such as a 401(k). 

The private letter ruling points to several important conditions including:  

  • the nonelective contribution is not conditioned on the employee making elective contributions 
  • the employee may still make elective contributions to the plan and,  
  • the plan sponsor will not extend any student loans to employees eligible for the program.

Below are the facts in the private letter ruling approved by the IRS:

  • Employees can voluntarily enroll in the program and opt out of the program at any time.   
  • The employer’s existing matching contribution of 5 percent of compensation (for those that contribute 2 percent or more of compensation) will continue in place for those who do not elect to enroll in the program.    
  • If an employee does enroll and makes a student loan repayment of at least 2 percent of their eligible compensation for the given pay period, the employer will make a nonelective contribution of 5 percent of the employee’s compensation during that period. However, if the employee also makes an elective contribution they will not receive a matching contribution. Please note that employees are not required to make repayments every pay period.   
  • The program requires the employee to be employed on the last day of the year to receive the nonelective employer contribution. 
  • Under this program the employer’s cost remains the same whether the employee chooses to make a student loan payment or make a 401(k)-elective contribution. The benefit is that the employee does not lose the opportunity to receive employer matching dollars while paying down their student debt in lieu of funding their retirement.

While employers may not legally rely on guidance included in a private letter ruling issued to a specific employer, it is a sign for what the IRS may find acceptable. A detailed review of compliance with IRS nondiscrimination rules should be considered before adopting such a program. For more information about the 401(k) Plan-related student loan benefit program, please contact your Sikich advisor. 

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