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PSCA Executive Reports

June 20, 2019

IRS Plans Guidance Project on Student Loan Benefits

At a recent bar association meeting of benefits attorneys, a senior IRS official announced that IRS would open a guidance project on the provision of student loan benefits under qualified plans. It’s unclear, however, when the guidance will be released and, in the meantime, the IRS will not consider any private letter rulings on the subject.

Background
Last summer, the IRS publicly released a private letter ruling (PLR 201833012, May 22, 2018) –the Abbott Labs ruling – regarding the employer’s proposal to amend its plan to include a student loan benefit program. The program is part of the employer’s defined contribution plan, which includes a cash or deferred arrangement under Code section 401(k) and permits an employee to make pre-tax, Roth, and after-tax contributions (“elective contributions”). Before the addition of the program, the plan provided for a regular matching contribution equal to 5% of the employee’s compensation for each pay period that an employee makes an elective contribution equal to 2% or more of his eligible compensation for the pay period. This regular matching contribution will continue to apply for any employees who do not elect to enroll in the program.

As proposed, all employees will be eligible to enroll in a voluntary student loan benefit program under the plan. If an employee enrolls in the program and makes a student loan repayment equal to 2% or more of his eligible compensation for a pay period, the employer will make a nonelective contribution to the plan equal to 5% of the employee’s compensation for that period. This nonelective contribution will be made as soon as practicable after the end of the year, but only if the employee is still employed at the end of the year (unless the termination was because of death or disability). An employee who enrolls in the program is not required to make a student loan repayment each pay period and can opt out at any time.

In the private ruling, the IRS concluded that the Abbott program will not violate the “contingent benefit” prohibition under Code section 401(k)(4)(A) and Treasury Regulation section 1.401(k)-1(e)(6), based on three important factors:

  • the nonelective contribution under the program is not itself conditioned on the employee making, or not making, elective contributions to the plan, 
  • because an employee may make elective contributions in addition to student loan repayments, the nonelective contribution is not contingent on the employee electing to make or not make elective contributions in lieu of receiving cash, and 
  • the plan sponsor will not make any student loans to employees eligible for the program. 

Further, the IRS noted that the applicable plan qualification requirements will continue to apply to the nonelective contribution (e.g., eligibility, vesting, distributions rules, contribution limits, and coverage and nondiscrimination testing rules), and that the “true-up” matching contribution will need to be included for purposes of Code section 401(m) non-discrimination testing. This IRS letter ruling may only be relied upon by Abbott Labs. (Code sec. 6110(k)(3)).

Effect of Informal Announcement
While it’s helpful that IRS is willing to open a guidance project on student loan benefits, employers should not applaud too loudly for several reasons.

  • While the IRS official expressed hope that guidance on the Abbott design might be issued soon, no timetable was given. 
  • It’s unclear whether the IRS would issue guidance on any of the related compliance issues noted above. 
  • Until the guidance is issued, taxpayers have no ability to seek rulings on this or other student loan plan designs. 

In the meantime, employers who wish to closely follow the Abbott Labs design probably have little risk in doing so, while employers with other designs may want to consider obtaining a legal opinion.

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