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Student Loan Repayments or Retirement Savings? Maybe Both . . .

Authors: Robert S. Ellerbrock, III (Birmingham), Margaret E. Hayes (Indianapolis)

Published Date: October 4, 2018

Recent statistics show that approximately 70 percent of college graduates will leave college with an average of at least $30,000 in student loan debt. Cumulatively, the national student loan debt is approximately $1.5 trillion. This burden is causing millennials to wait longer than previous generations to buy houses, start families, and save for retirement. Although student loan indebtedness is not an issue employers can solve alone, a few are finding ways to recruit and retain talent by offering a helping hand to employees dealing with massive debt burdens.

One drawback to traditional employer student loan repayment approaches is the lack of tax incentive from the federal government. Currently, employer payments for student loan assistance are treated as taxable wages to the employee. That said, proposals aimed at updating the Internal Revenue Code to reflect current student debt issues are working their way through Congress right now. One proposal, H.R. 795, seeks to amend the Code to permit an exclusion from taxable income for student loan repayment assistance by an employer. A similar bill, H.R. 2551, reflects this change but also proposes increasing the annual exclusion limit for tuition assistance from $5,250 to $10,000, thereby allowing up to a $10,000 annual exclusion for student loan repayment assistance in some cases. Since their introduction, neither bill has been widely discussed.

The Internal Revenue Service (IRS) recently acknowledged the student loan issue by releasing Private Letter Ruling (PLR) 201833012. This PLR was issued in response to an employer’s inquiry regarding a proposed amendment to the employer’s 401(k) plan to offer a student loan benefit program. The program would permit the taxpayer (i.e., the employer) to make a special contribution, termed a “student loan repayment (SLR) nonelective contribution,” based on employees’ student loan repayments.

The IRS cleared a path to permit these special employer contributions to 401(k) plans by clarifying that they would not violate the “contingent benefit” prohibition under the Code. The contingent benefit rule prohibits any benefit, other than a matching contribution, that is conditioned (directly or indirectly) on an employee’s making elective contributions to a 401(k) plan. Importantly, the IRS based its ruling on the specific provisions of the plan referenced in the request. While the PLR confirmed that adding an SLR nonelective contribution amendment was permissible, the PLR was very limited in scope. It expressly stated that the letter should not be read as an opinion on the tax consequences of adding this type of provision to a 401(k) plan or whether such a plan would satisfy the requirements of 401(a) of the Code. While other employers may not rely on the PLR, this is the first insight the IRS has provided on its willingness to consider student loan repayment options in the larger benefits regime.

Employers should consider the following points before implementing a special employer contribution based on employees’ student loan repayments:

  • Pre-approved plan documents may be too rigid to permit a special contribution structured like the one in this PLR.
  • The plan design will impact nondiscrimination and coverage testing for non-elective contributions. This is because the SLR nonelective contribution is not counted toward the average contribution percentage (ACP) test, student loan repayments are not counted toward the average deferral percentage (ADP) test, and non-highly compensated employees may utilize the benefit and draw down the average ADP for non-highly compensated employees.

For employers looking for ways to attract and retain talent and help reduce employees’ student loan burdens, this type of 401(k) contribution may be an attractive option. As benefits administration providers continue to market student loan assistance options, other factors must be considered before making plan changes. Employers may want to work with recordkeepers and other professionals to identify appropriate 401(k) plan design options and determine the tax consequences and any impact on nondiscrimination testing.

Robert S. Ellerbrock, III  (Birmingham)

Robert S. Ellerbrock, III
Bob Ellerbrock focuses his practice on employee benefits and ERISA.  He regularly  advises clients concerning qualified retirement plans (401(k), defined benefit, 403(b)),  non-qualified plans, fringe benefits, health and welfare benefits, Affordable Care Act compliance,  and executive compensation issues. With experience in the retirement plan industry prior to practicing law, Bob draws on his knowledge counseling clients in the design and implementation of all types of employee benefit plans.
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Margaret E. Hayes  (Indianapolis)

Margaret E. Hayes
Ms. Hayes joined Ogletree in 2018. Her practice focuses on qualified and non-qualified retirement plans, ERISA compliance, executive compensation arrangement, health and welfare plans. Ms. Hayes assists clients with designing plans that provide benefits for employees, including qualified and non-qualified plans, severance plans, health plans, and executive compensation arrangements. She also provides guidance to clients with regard to ERISA compliance, the operation and interpretation of plans,...

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