One of the challenges facing young and not so young workers is repayment of student loans. And, employers are feverishly looking for ways to attract and retain employees.  One of the ways an employer can entice its present and incoming workforce is to assist employees in repayment of their student loans. 

At this juncture, there is no tax-favored way to assist in this process; though, the Congress has considered facilitating a way to do so.

Of late, the Internal Revenue Service recently released a Private Letter Ruling (PLR 201833012) relating to offering a student loan repayment program through an IRC Section 401(k) plan.  Important to note that a Private Letter Ruling (PLR) is only binding on the taxpayer requesting it; but a PLR indicates, to the general public, the IRS’ position on a particular fact situation.

In the scenario outlined in the PLR, the unidentified employer requests the IRS’ opinion on how it would view a program whereby the employer would make a nonelective contribution to its 401(k) plan.  Under the employer’s current 401(k) plan, eligible employees can make elective contributions of 2% of their compensation per pay period, to which the employer match is five percent. 

The employer proposes to amend its plan to offer a voluntary student loan repayment program.  The proposed program would permit the employee to make a minimum loan repayment of 2% of his/her compensation per payroll period to which the employer would make a nonelective contribution equal to 5% of the employee’s eligible compensation.  This nonelective contribution is made without regard to whether the employee makes any elective contribution to the plan.

Code Section 401(k) plans must satisfy numerous qualification requirements relating to contributions, distributions, nonforfeitures, as well as nondiscrimination rules.   Specifically, a 401(k) plan must comply with a contingent benefit rule under which no other benefit can be directly or indirectly conditioned on whether the participating employee elects to make (or declines to make) a contribution to the plan. 

According to the terms of the proposed program outlined in the PLR, the IRS concluded that the contingent benefit rule would not be violated by offering this type of nonelective employer contribution design in connection with a student loan repayment program.

An employer contemplating this type of program should work closely with its legal counsel.