The IRS has issued private letter ruling (PLR) 201833012, responding to a request for a ruling on a proposed employer 401(k) plan feature to be associated with employees’ student loan repayments. After review, the IRS approved the request and added explanation of why the facts as presented will not violate retirement plan laws and regulations. While this is a private letter ruling to be relied upon by the requestor, it is not a new concept as it has been proposed in at least one federal bill introduced by a member of Congress and has been a subject of discussion within the retirement plan industry.
Under the 401(k) plan of the employer on whose behalf the PLR application was submitted, matching contributions are now received by those participating employees who defer their salary into the plan. The PLR request proposes to amend the plan to add an element tied to student loan repayment. Under the arrangement proposed, if an employee affirmatively elects to participate in the employer’s student loan benefit program, and during a pay period makes a student loan repayment equal to at least 2 percent of his compensation, the employer would make a “student loan repayment nonelective contribution” of 5 percent of that pay period’s compensation to the employee’s 401(k) plan account.
This nonelective contribution formula, incidentally, is identical to the plan’s matching contribution formula for those employees who defer their salary into the 401(k) plan. That is, all eligible employees who defer at a rate of at least 2 percent earn a “matching contribution” of 5 percent. Furthermore, it would not be an either/or situation. An employee who participates in the student loan benefit program could simultaneously defer salary into the 401(k) plan, and if deferring at least 2 percent, also earn the plan’s 5 percent matching contribution.
The PLR notes that under the proposal the student loan repayment nonelective contribution would be “subject to all the applicable plan qualification requirements, including, but not limited to, eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing.”
The IRS specifically notes that the employer’s contribution under the student loan repayment program will not be treated as a matching contribution, thereby avoiding conflict with the “contingent benefit prohibition” of 401(k) plans. If the employer’s contribution associated with the student loan benefit program were to be considered a matching contribution received for an employee’s action outside the scope of the plan, such as making student loan repayments, the rule would be violated. Though it may seem only a semantic distinction, the fact that the benefit would be considered a nonelective contribution rather than a matching contribution is what led to the IRS to approve this PLR submission.
A plan contribution such as that proposed in this PLR might not be available in every plan document, and even with a document that would allow a special allocation approach such as described here, it bears repeating the PLR’s emphasis that all applicable plan qualification requirements must be met.
Note that a PLR may only be relied upon by the party to whom it is issued, though it generally is recognized that a PLR may reflect IRS policy and ruling inclinations for similar or identical fact patterns.