On August 17, 2018, at the request of a 401(k) plan sponsor, the IRS issued a private letter ruling 201833012 (the “Ruling”). The Ruling was requested with the intent of assisting individuals, currently around forty-four (44) million Americans with student loan debt of more than $1.3 trillion dollars. The Ruling provides a method for employers, under certain circumstances, to provide a student loan repayment benefit as part of their 401(k) plans and link the amount of employer contributions made on an employee’s behalf to the amount of student loan repayments made by the employee outside the plan.
The Ruling permits an employer to 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. Key features of the Ruling include: (i) voluntary participation in the student loan repayment benefit program and ability to opt out, subject to plan restrictions; (ii) the student loan repayment benefit will replace the employer matching contribution; (iii) the repayment benefit is subject to coverage and nondiscrimination testing; and (iv) is predicated on the plan sponsor not extending any student loans to employees that will be eligible for the program.
The student loan repayment non-elective contributions will be subject to the same vesting schedule as regular employer matching contributions and subject to all applicable plan qualification requirements, including eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing. However, the student loan repayment non-elective contribution will not be treated as a matching contribution for purposes of any testing.
