IRS Issues Private Letter Ruling on Student Loan Payments from Retirement Plan

On August 17, 2018 the Internal Revenue Service (“IRS”) issued Private Letter Ruling 201833012 responding to a request by an Employer for a ruling on the Employer’s proposed “student loan benefit program” under its qualified 401(k) retirement plan in accordance with the Internal Revenue Code (the “Code”) and corresponding regulations. The facts submitted to the IRS and its analysis are summarized as follows.

The “Loan Program”

In PLR 201833012, the Employer sponsors a defined contribution plan with a section 401(k) cash or deferred arrangement feature that is intended to qualify under Code Section 401(a) (the “Plan”). Eligible employees may elect to contribute a portion of his or her salary to the Plan on pre-tax or after-tax Roth 401(K) basis. If the elective contribution is equal to at least 2% of the employee’s salary during the pay period, the Employer makes a matching contribution equal to 5% of the employee’s compensation during the pay period. These matching contributions are made each payroll period.

The Employer proposed to amend the Plan to offer a student loan benefit program (the “Loan Program”) in which the Employer would make a nonelective contribution on behalf of the employee conditioned on the employee making student loan repayments. This Loan Program is voluntary and the employee can opt out at any time. If the employee elects to participate in the Loan Program, the employee would make a student loan repayment during a pay period equal to at least 2% of his or her salary for that pay period. The Employer would then make a student loan repayment nonelective contribution as soon as practicable after the end of the Plan year equal to 5% of the employee’s salary for that pay period. This nonelective contribution is made without regard to whether the employee made any elective contributions under the 401(k) feature of the Plan during the year. If the employee does not make a student loan repayment equal to at least 2% of his or her salary for a pay period but does make an elective contribution to the 401(k) component of the Plan, the Employer will make a matching contribution as soon as practicable after the end of the Plan year equal to 5% of the employee’s salary for that pay period (the “True-Up Matching Contribution”). To receive either the Loan Program benefits or the True-Up Matching Contributions, the employee would need to be employed with the Employer on the last day of the Plan year.

Both the Loan Program contributions and True-Up Matching Contributions will be subject to the same vesting schedule as the regular 401(k) matching contributions. All applicable Plan qualification requirements including vesting, eligibility, and distribution rules, contribution limits, and coverage and nondiscrimination testing will apply to the Loan Program contributions. The Loan Program contributions will not be treated as a matching contribution for purposes of any testing under or the requirements of section 401(m) of the Code. The True-Up Matching Contributions will be included as a matching contribution for purposes of any testing under or requirement of section 401(m) of the Code. In addition, the Employer will not extend any student loans to employees eligible for the Loan Program.

Ruling Requested and IRS Conclusion

The Employer requested a ruling from the IRS that the Loan Program contributions would not violate the “contingent benefit” prohibitions of the Code and associated Treasury Regulations. Code Section 401(k)(4)(A) provides:

A cash or deferred arrangement of any employer shall not be treated as a 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. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election.

Treasury Regulation Section 1.401(k)-1(e)(6) provides:

A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee’s electing to make or not to make elective contributions under the arrangement. The preceding sentence does not apply to

(A) Any matching contribution (as defined in § 1.401(m)-1(a)(2)) made by reason of such an election….

The IRS pointed out that the Loan Program contributions were conditioned on the employee making contributions to the Loan Program and not a cash or deferred arrangement and the employee was able to make contributions to the Loan Program (and receive nonelective contributions) in addition to elective contributions to the Plan, therefore meaning the Loan Program nonelective contributions by the Employer are not conditioned on the employee making an election to have the employer make or not make contributions under the Loan Program in lieu of receiving cash. The IRS therefore held that the Loan Program did not violate Code Section 401(k)(4)(A) or Treasury Regulation Section 1.401(k)-1(e)(6). The IRS did not however extend this ruling to say whether the Plan satisfies the requirements of Code Section 401(a) or to what extent there could be any other federal tax consequences beyond the scope of this ruling.

Conclusion

While this PLR cannot be technically relied upon by any party other than the PLR’s taxpayer, this ruling by the IRS is a positive step for employers looking to add an attractive feature to their employee compensation packages. It is very important when looking to add one of these “student loan repayment programs” that all areas of ERISA and the Code are satisfied in addition to what was addressed in this PLR.

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September 14th, 2018|