With growing student loan debt pushing employees to delay contributing to their employers' 401(k) plans (as well as delaying major life events such as buying a home, getting married and starting a family), many employers have been looking for ways to help their employees save for retirement. One proposed method is for employers to make a contribution to 401(k) plans on an employee's behalf if a certain percentage of the employee's compensation is used for repaying his or her student loan debt.
A recent Internal Revenue Service (IRS) Private Letter Ruling surmounts one perceived legal hurdle. However, despite all of the positive media coverage that has been issued, there remain a number of other obstacles to overcome.
In Private Letter Ruling 201833012, the IRS reviewed a company's program that provided the following employer contributions for an employee who was employed on the last day of the plan year (or terminated employment during the plan year due to death or disability):
Section 401(k)(4)(A) of the Internal Revenue Code of 1986, as amended (Code), provides that a 401(k) plan will not be tax-qualified if any benefit other than matching contributions "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." The company requested a Private Letter Ruling (PLR) that its program did not violate this contingent benefit prohibition under Code Section 401(k)(4)(A) and the regulations thereunder.
In this PLR, which is only applicable to the party that requested it, the IRS held that there was no violation of the contingent benefit prohibition because:
The PLR did not address whether the proposed contributions, when taken in conjunction with other plan provisions, would meet the qualification requirements of Code Section 401(a). Such contributions may cause certain plans to fail coverage testing under Code Section 410(b) and/or nondiscrimination testing under Code Section 401(a)(4).
While it is certainly welcome news that student loan repayment nonelective contributions are not a per se violation of the contingent benefit prohibition under the Code, employers must consider many other factors in deciding if such a program is right for them. The difficulty, uncertainty and costs involved in passing coverage and nondiscrimination testing each year may be a deal-breaker for some employers. Also, employees who have been delaying major life events may place greater value on additional pay that is not contingent on repayment of student loan debt. Employers should evaluate whether making student loan nonelective contributions is the best use of their funds in attracting and retaining desired employees.
For more information about the feasibility of student loan repayment nonelective contributions under a 401(k) plan or other employee benefits or executive compensation matters, contact the author or a member of Holland & Knight's Employee Benefits and Executive Compensation Group, including Partners Ari Alvarez, Kelly Bley, Gregory Brown, Bob Friedman, Claudia Hinsch or Victoria Zerjav.
1 This is different than coverage testing for elective deferrals (pre-tax and Roth 401(k) contributions) and after-tax contributions, where an employee is treated as covered by the plan if he or she is eligible to make such contributions, regardless of whether the contributions are actually made.
2 In general, for 2018 an employee is a highly compensated employee if he or she is a 5 percent owner in 2017 or 2018, or earned more than $120,000 in 2017. The dollar amount is indexed each year for cost-of-living.
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