According to a recent study, Americans currently owe approximately $1.4 trillion in student loan debt. With increasing pressure to pay off student loans, some employees choose not to contribute to retirement programs offered by their employers. Instead, employees use discretionary income to pay down student loan debt. Some employers have contemplated how to offer a student loan employee benefit plan to help ease their employees’ debt load. One company recently asked the Internal Revenue Service whether its proposed student loan benefit plan complied with certain portions of ERISA and the Internal Revenue Code (the “IRC”). Thanks to the creativity of that company, employers may now have the blueprint to establish a student loan benefit plan that satisfies federal requirements.  

On August 17, 2018, the IRS issued Private Letter Ruling Number 201833012, which addressed whether an employer’s proposed student loan benefit plan complied with the IRC, specifically prohibitions on contingent benefits applicable to IRC Section 401(k) retirement plans.   

The employer sought to modify its existing plan to offer a student loan benefit option. The employer’s existing plan was a common 401(k) plan under which employees received an employer contribution equal to five percent of their eligible compensation, provided that any such employee contributed at least two percent of their eligible income to the plan during a pay period.

The employer’s proposal allowed its employees to elect to participate in a student loan benefit option of its existing 401(k) plan on a voluntary basis. If an employee elects to participate in the student loan benefit option:

• The employer agrees to make a non-elective contribution of five percent of an employee’s eligible compensation to the company’s 401(k) plan if such employee paid at least two percent of his or her eligible income toward student loans during a pay period;
• The employee is still eligible to make contributions to his or her 401(k) retirement account, in addition to student loan payments; and
• The employer is required to make a non-elective contribution of five percent of an employee’s eligible compensation to the company’s 401(k) plan if such employee did not make sufficient student loan payments during a pay period, but contributed at least two percent of his or her eligible compensation to the individual 401(k) retirement account. In such circumstances, the employer must make the non-elective contribution as soon as practicable after the end of the plan year.

While Private Letter Rulings are only binding on the taxpayer requesting the ruling, the IRS provided a general blueprint for companies who may wish to implement a student loan benefit program. Offering a student loan benefit plan, such as the one outlined in PLR 201833012, could be a very attractive option for many qualified candidates. Further, such a plan could provide a tool to attract top tier candidates and to retain existing talent. 

For any questions regarding this article, or if your company may be interested in offering a student loan benefit plan, please contact us.