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Some Relief for Student Loan Repayment in Your 401(k) Plan

September 7, 2018

The Growing Problem for Young Workers

It is well known that young workers are facing unprecedented levels of student debt. A common concern that employers hear from younger employees is that they cannot save for retirement and pay off student loans at the same timeā€”but many are missing out on employer matching contributions by not contributing to a 401(k) plan. Recently, the Internal Revenue Service ("IRS") published a private letter ruling (the "Ruling"), which presents one employer's solution to this increasingly common problem. The Ruling approves a special program within a 401(k) Plan that allows employees making student loan repayments to be rewarded with contributions under their employer's 401(k) plan regardless of whether the employee contributes any of his or her own money to the 401(k) plan.

The Newly Approved 401(k) Contribution Structure

An employer requested a Ruling asking whether the employer-sponsored 401(k) plan can be amended to add a new type of employer non-elective contribution. Under the proposed contribution structure, the employer would provide a non-elective contribution equal to 5% of an employee's compensation for a pay period if the employee makes student loan repayments equal to at least 2% of his or her compensation (the "SLR contribution") during the pay period. Some further details about the SLR contribution structure are as follows:

  • The SLR contribution is available to all employees, but they must affirmatively elect to enter into the program;
  • Employees are eligible to receive for each pay period either: (1) the SLR contribution if they make student loan repayments, or (2) regular matching contributions if they make salary deferral contributions, but not both;
  • Employees are not required to make their own salary deferral contributions to the plan to receive the SLR contribution, but they are free to do so;
  • The SLR contributions and matching contributions for the plan year are made shortly after the end of each plan year, and are calculated on a payroll-by-payroll basis, based on whether the participant made student loan repayments, salary deferral contributions, or neither, for each pay period; and
  • Employees may opt out of the program prospectively.

The SLR contribution would be similar in amount to the matching contributions already available under the plan. An important difference, however, is that employees are not required to contribute any money into the plan in order to receive the SLR contribution. Instead, the SLR contribution is based entirely on the amount of student loan repayments that an employee makes during a pay period.

The IRS Ruling on the New Contribution Structure

A key aspect of the IRS's reasoning for approving the SLR contribution is that eligibility for the SLR contribution is not based on whether a participant makes contributions to the plan. The Internal Revenue Code and IRS regulations prohibit 401(k) plan designs in which "other benefits" are conditioned on an employee's contributions to the plan. The Ruling was issued to a specific taxpayer but we note that that other aspects of the SLR contribution structure, such as the amount of the employer's contribution, could be changed. The SLR contribution is still subject to the plan's general vesting, non-discrimination, and other legal requirements. A plan sponsor interested in providing a similar program should work closely with plan counsel to ensure compliance with various qualified plan requirements.

If you have any questions about the information above or how to make similar changes to your retirement plan, please contact the authors or any member of the Employee Benefits and Executive Compensation Group at Venable LLP.