In a Private Letter Ruling released on 17 August 2018 (PLR 201833012) (“Ruling”), the IRS approved an employer’s proposed amendment to its 401(k) plan (“Plan”), under which it would make an employer non-elective contribution on behalf of an employee conditioned on the employee making student loan repayments (“SLR non-elective contribution”).

As described in the Ruling, the proposed student loan repayment benefit program (the “program”), is a voluntary program under which the employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the Plan but would not be eligible to receive regular matching contributions with respect to those elective contributions. Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then the plan sponsor will make an SLR non-elective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period. The SLR non-elective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee does not make a student loan repayment for a pay period equal to at least 2% of the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee’s eligible compensation for that pay period, then the Plan sponsor will make a matching contribution as soon as practicable after the end of the Plan year equal to 5% of the employee’s eligible compensation for that pay period (true-up matching contribution).

As further described in the Ruling, the employer requested confirmation whether its proposed amendment to the Plan would violate the “contingent benefit” rule under Code Section 401(k)(4)(A) and related regulations. Section 401(k)(4)(A) provides in pertinent part that: “A cash or deferred arrangement of any employer shall not be treated as qualified cash or deferred arrangement if any other benefit is 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.”

In the current case, the IRS reasoned that the SLR non-elective 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. The IRS further noted that because an employee who makes student loan repayments and thereby receives SLR non-elective contributions is still permitted to make elective contributions, the SLR non-elective 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. Accordingly, the IRS concluded that the proposed program would not violate the “contingent benefit” rule.

While an IRS Private Letter Ruling is directed only to the taxpayer requesting it, the Ruling could open the door to employers considering similar programs.

Explore More Insight
View All