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401(k) Match for Student Loan Repayment

In a recent Private Letter Ruling, the Internal Revenue Service (“IRS”) approved a 401(k) plan design where an employer “matches” an employee’s student loan repayments by making non-elective contributions to the employees’ retirement account.  While Private Letter Rulings are only binding on the taxpayer who requested and received the ruling, most in the retirement industry believe that general IRS guidance will soon arrive allowing all plan sponsors the ability to include this provision in their retirement plans.

The plan sponsor that requested the ruling had a very generous matching program.  It is unclear if future guidance will require similar percentages, or if general provisions will apply giving plan sponsors the ability to determine how much of a nonelective contribution they wish to make towards student loan repayment.  According to the private letter ruling, student loan repayment nonelective contributions must:

  • Require that an employee make a student loan repayment each pay period that equals at least 2% of compensation for the pay period;
  • Require the employer, if the employee meets that requirement, to make a student loan repayment nonelective contribution equal to 5% of compensation for the pay period;
  • Ensure the nonelective contribution be made as soon as practicable after the end of the plan year; although calculated per pay period, the nonelective contribution need not be made each pay period;
  • Require the nonelective contribution be made even if the employee is making traditional salary deferrals during the plan year;
  • Require that the employee be employed on the last day of the plan year;
  • Be subject to the same vesting schedule as regular matching contributions
  • Require the nonelective contribution be subject to eligibility requirements, distribution rules, contribution limits, and nondiscrimination testing;
  • Not treat the nonelective contribution as a regular matching contribution for 401(m) testing

If the IRS issues guidance similar to the instruction given in the Private Letter Ruling, the program must contain the following features:

  • It must be completely voluntary; the employee must affirmatively elect to enroll;
  • Employees also must be allowed to opt out;
  • Once enrolled, employees must still be eligible to make elective deferrals;
  • Employees are then eligible to receive student loan repayment matching contributions and true-up matching contributions;
  • If the employee opts out of enrollment, they will again be eligible for regular matching provisions, as contained in the plan document.

For true-up contributions, the letter describes the arrangement as follows:

  • If the employee does not meet the student loan repayment requirements for a pay period, but does make an elective deferral of at least 2% of compensation, the true-up match will be equal to 5% of compensation for the pay period;
  • Employee must be employed on the last day of the plan year;
  • True-ups are included in the plan’s normal vesting schedule and treated as regular matching contributions for 401(m) testing;
  • True-up contributions must be made as soon as feasible after the end of the plan year.

If the IRS allows this program for all retirement plans it could be a very attractive option for employers with a younger workforce who are looking to increase participation in the retirement plan.  If you have any questions, please contact your Relationship Manager.

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