I Want To Provide Student Loan Repayment Assistance To My Employees

Recent IRS Ruling Could Allow Employers to Pay Down Student Debt Using 401(k) Matching Funds

Finally, some welcome news in the fight against the national student loan debt crisis.  In what could potentially be a significant and encouraging first step in allowing employers to take a tax-favored approach in helping employees with student loan debt, the Internal Revenue Service recently issued a private letter ruling, PLR 201833012. The ruling concerned a company’s specific application of student loan benefits under a 401(k) plan.  The program in question allowed for employees to receive a contribution equal to 5% of their salary to their 401(k) plan if they make a payment towards their student loan debt of at least 2%.  Under the program, the employee did not have to contribute to their 401(k) plan to receive the contribution.

What happened?

The ruling allows, under certain circumstances, for an employer to treat student loan payments similar to an elective contribution to a 401(k) plan. This prompts a matching contribution to be made to the employee’s 401(k) plan. In other words, the employee makes an independent payment towards their student loan debt account and the employer contributes a matching amount to the employee’s 401(k) plan just as if the employee had made the contribution to the 401(k) plan.

The central question at issue in the ruling was whether the proposed program would violate the “contingent benefit” rule of the Internal Revenue Code of 1986.  This rule prohibits an employer from conditioning the employee’s receipt of benefits (like welfare benefits, stock options, or other forms of compensation) on that employee’s ability to make contributions to their 401(k).  Notably, matching contributions was the exception to this rule since contingency is necessary for an employer to be able to match.

The IRS found that the program in question did not violate the “contingent benefit” rule.  They made this determination on a variety of factors, but essentially they have determined that companies can treat the program, for purposes of compliance, the same as a matching contribution, which, again, does not violate the rule.

Why Should You Care?

This is encouraging news for a couple of reasons.  First, it provides additional incentive for companies to take an interest in such a program.  Currently, only about 4% of employers in the United States offer student loan repayment assistance.  Part of the issue is the fact that contributions under the program still count as income for the purposes of taxes.

Much has been discussed, particularly in our own blog series, about the lack of tax incentive in running employer student loan repayment assistance contributions through regular payroll systems.  This recent ruling could pave the way for companies to provide assistance to their employees on a tax-favored basis by allowing for tax-deferred contributions to an employee’s 401(k) plan.

On a broader level, this ruling may help solve a pressing issue of employees with student loan debt, which concerns their ability to save for retirement.  In a recent survey, 80% of employees said that student loan debt impacted their ability to save for retirement. With this approach, it becomes possible for employees to make payments towards their student loan debt account while simultaneously saving money for retirement. That’s a huge deal.

What Now?

This new ruling might pave the way for those with student loan debt to be able to secure their financial futures more effectively, thus having broad and lasting effects on the student loan debt crisis as a whole and on the lives and well-being of the employees who receive it.

It is important to note that the IRS has made it clear that its ruling applies only to the individual company that applied for approval of this structuring. Nonetheless, this ruling raises the question of whether the government is willing to adjust the law to allow for other companies to implement similar structuring.

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