Earlier today, the IRS released a private letter ruling which will help clear the way for employers to provide a new type of student loan repayment benefit as part of their 401(k) plans. This ruling is important because many employers have been looking for ways to help their employees manage student loan repayment obligations, but to date the options available for doing so have been rather limited.
Over the last decade, the amount of outstanding student loan debt in the US has nearly tripled. Studies suggest there are currently around 44 million Americans with student loan debt, bringing the total student loan debt obligation in the US to more than $1.3 trillion dollars. As a result, not surprisingly, managing student loan debt has become an increasingly significant concern for many employees. This includes not only employees who are entering the workforce for the first time, but also older workers who may still have student loan repayment obligations of their own, or who may have taken on some of those obligations for their children.
With student loan debt obligations on the rise, employees are placing increasing value on the availability of employer-provided student loan repayment assistance. In a 2015 survey, more than three-quarters of young professionals said that the availability of employer-provided student loan repayment assistance would be a considerable factor in deciding to accept a job offer. As a result, forward-thinking companies are looking for new ways to help their employees tackle student loan debt. A private letter ruling (PLR) released by the Internal Revenue Service (IRS) earlier today will help clear the way for these companies to offer a new type of student loan benefit as part of their 401(k) plans.
Key Features of New Student Loan Repayment Benefit
By issuing the PLR, the IRS gave its blessing to an employer-provided student loan repayment benefit offered through an employer’s 401(k) plan. More specifically, the PLR confirmed that, under certain circumstances, employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan.
Historically, many plan sponsors have questioned whether such an approach would be permissible under IRS rules. As a result, to date, employers have been reluctant to create student loan benefit programs that specifically link 401(k) plan contributions to student loan repayments. However, the PLR provides welcome confirmation that such an arrangement is permissible under certain circumstances. In particular, the IRS concluded that the employer could make a non-elective contribution to its 401(k) plan, where the amount of the non-elective contribution would be based on an employee’s total student loan repayments and would be contributed to the plan in lieu of the matching contributions that would otherwise be made to the plan had the employee made pre-tax, Roth 401(k) and/or after-tax contributions.
The student loan benefit program detailed in the PLR includes a number of key features:
Participation in the student loan repayment benefit program is voluntary. If an employee signs up to participate, then for each payroll period during which the employee makes sufficient student loan repayments, the employee is eligible to receive a non-elective employer contribution. The non-elective employer contribution is equal to the matching contribution the employee would otherwise receive if the employee made pre-tax, Roth 401(k) and/or after-tax contributions to the plan during the same payroll period.
The student loan repayment benefit effectively replaces the employer matching contribution for an employee who chooses to participate in the program. An employee who signs up for the program is not eligible to receive regular matching contributions under the plan while the employee is participating in the student loan repayment program. However, the employer provides a year-end true-up match to ensure that if an employee fails to make sufficient student loan repayments to receive the full student-loan-based non-elective employer contribution for any payroll period, but does make pre-tax, Roth 401(k) and/or after-tax contributions during the same period, the employee will be eligible to receive a true-up matching contribution. The true-up matching contribution is equal to the regular matching contribution the employee would otherwise be entitled to receive for such payroll period.
The student loan repayment benefit is subject to coverage and nondiscrimination testing, as well as other applicable requirements for a qualified retirement plan, including contribution limits, eligibility and vesting and distribution rules.
Impact of IRS Ruling on Employers
Employer-provided student loan benefit programs are still relatively new. In fact, recent surveys have suggested only about 4 percent of employers currently offer their employees some form of assistance or incentive to repay student loans. Most other companies are still trying to figure out what (if any) student loan benefit programs are well-suited for their workforce. As a result, the PLR provides helpful guidance for employers looking for new ways to provide such benefits and, in particular, for employers looking for ways to accomplish the dual purpose of helping employees manage student loan repayment obligations while saving for retirement.
From a cost perspective, the student-loan-repayment-based non-elective employer contribution approved in the PLR is also arguably closer to cost-neutral than most other student loan benefit programs. Typically, student loan benefits (like traditional student loan reimbursement payments) result in an additional cost for the employer because the employer is adding a new benefit that requires paying an additional amount to employees in the form of the student loan benefit. However, under the program described in the PLR, employees aren’t eligible to receive any more in total contributions under the 401(k) plan than they could otherwise be entitled to receive in regular matching contributions. The student-loan-based non-elective employer contribution essentially offsets any matching contribution an employee would otherwise be eligible to receive under the plan. This means that, unlike other types of student loan benefits, employers may be able to add a student-loan-repayment-based non-elective employer contribution to their existing retirement plan without considerable additional costs.
Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, the PLR will very likely cause many employers, particularly employers with a young and educated workforce, to consider offering a student loan benefit as part of their retirement program.
Importantly, employers who wish to do so should take care to review their 401(k) plans for special rules, features or design elements (outside those discussed in the PLR) that might create additional hurdles to linking the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. For example, some of the special rules that apply to safe harbor plans could limit an employer’s ability to create a similar student loan benefit structure.