REPAY STUDENT LOANS OR SAVE IN A RETIREMENT PLAN? WHY NOT BOTH?

Many employees feel squeezed to both pay off their debt and save for their future.  A recent Private Letter Ruling (PLR) opens the door for employers to help them.

The average student graduating in 2019 has $28,950  in student loan debt.(1)  According to the new York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000.

What do these number mean for you?  They mean that debt repayment is typically an employee's foremost priority.  It's not just the newly minted graduates, either--typically, student loan repayment is stretched over 10 years with close to an 11% default rate.

On August 17, 2018, the IRS issued private letter ruling 201833012 (the PLR).  The PLR addressed an individual plan sponsor's desire to amend their retirement plan to include a program for employees that were making student loan repayments.  The form of this benefit would be an employer non-elective contribution (SLR contribution).

The design of the plan would result in matching contributions being available to participants equal to 5% of compensation for every 2% of compensation deferred.  It includes a true-up.  Employees could receive up to 5% of compensation in the SLR contribution for every 2% of student loan repayments they made during the year.  The SLR contribution would be calculated at year-end.  The PLR states that the program would allow a participant to both defer into the retirement plan and make a student loan repayment at the same time but they would only receive either the match or the SLR contribution and not both for the same pay period.  If an employee enrolls in the student loan repayment program and later opts out without hitting the 2% threshold necessary for a SLR contribution, they would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.

The PLR requested that the IRS rule that such design would not violate the "contingent benefit" prohibition under the Internal Revenue Tax Code (the Code).  The Code and regulations essentially state that a cash or deferred arrangement does not violate the contingent benefit prohibition if no other benefit is conditioned upon the employee's election to make elective contributions under the arrangement.  The IRS ruled that the proposed design does not violate the contingent benefit prohibition.

All that said, it is important to note that a PLR is directed to a specific taxpayer requesting the ruling, and applicable only to the specific set of facts and circumstances included in the request.  That means other taxpayers (aka plan sponsors) cannot rely on the PLR as precedent.  It is not a regulation nor even formal guidance.  However, it does provide insight into how the IRS views certain arrangements.  Thus other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they similarly will not run afoul of the contingent benefit prohibition.

From a practical perspective, it is important to consider a few related and impactful, concepts and qualified plan rules.  First, companies are increasingly aware of the heavy student debt carried by their employees and wish to assist them in alleviating this burden.  They are exploring a myriad of programs they can offer that can assist their employees.  This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the retirement plan at the same the ability to avoid missing out on the "free money" being offered by their employer in the retirement plan (by essentially replacing the match they miss by not deferring with the SLR contribution they receive for participating in the student loan repayment program).  It is important to understand that while the IRS has ruled in regard to the contingent benefit prohibition, they stated definitively that all other qualification rules (testing, coverage, etc.) would remain operative.  Thus plan sponsors wishing to pursue adding such provisions to their retirement plans must be aware of how they undertake the design.  This design is very basic in that it requires deferral/student loan repayment equal to 2% for a 5% employer contribution (either match or SLR contribution).  There are no gradations.  This is important because if there are gradations it could create separate testing populations for each increment in regards to the SLR contribution because it is a non-elective contribution, not a matching contribution.  This can conceivable be a nightmare scenario for annual testing and administration.

If you are considering adding a student loan repayment program to your benefits package and/or wish to explore the potential for a qualified plan integrated program, please submit your name and email address to the right.

(1)  The Institute for College Access & Success; October 6, 2020

Last reviewed 6/1/2022