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Employer matching contributions for employee student loan repayments may be permissible in 401(k) plans

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Tax Hot Topics newsletterIRS ruled in PLR 201833012 that employer matching contributions for employee student loan repayments (instead of for employee elective deferrals) do not violate the contingent benefit prohibitions under Section 401(k)(4)(A). The ruling involved a 401(k) plan that allowed employees to make elective contributions to the plan on a pre-tax, after-tax or Roth basis. The plan also provided for an employer matching contribution equal to 5% of an employee’s eligible compensation for a pay period if the employee contributed at least 2% of his or her compensation to the plan for the pay period. 

According to the private letter ruling, the employer proposed to amend the plan to offer a student loan benefit program, where it would make a nonelective contribution after the end of the year equal to 5% of an employee’s compensation for each applicable pay period if the employee made a student loan repayment equal to at least 2% of his or her compensation for a pay period. The program would be voluntary, with participants able to opt out of enrollment prospectively. Program participants would still be eligible to make regular elective contributions to the plan, but would not be eligible to receive a regular matching contribution. However, if a program participant did not make a 2% student loan repayment for a pay period, but instead made at least a 2% elective contribution to the plan, the employer would make a “true-up matching contribution” after the end of the year equal to 5% of the employee’s compensation for the applicable pay period. 

In order to receive the program nonelective contribution or the true-up matching contribution, employees would be required to remain employed with the employer on the last day of the plan year (except when employment is terminated due to death or disability). 

The IRS stated that the student loan benefit program would not violate the contingent benefit provisions under Section 401(k)(4)(A) because employees participating in the program would still be permitted to make elective contributions to the qualified plan. Therefore, the employer’s nonelective contributions under the program would not be conditioned, directly or indirectly, on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.

Contacts
Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director, Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate, Washington National Tax Office
T +1 202 861 4107


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