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Looking to Recruit Millennials? Student Loan Repayment May Be a New Hook

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The IRS has recently opened the door to a new method for providing employment benefits in the form of student loan repayment assistance, offering small business owners a potentially powerful tool for attracting and retaining top-tier employees.

While many small business owners have likely considered offering student loan repayment assistance benefits in the past, this new strategy could allow student loan assistance in a tax-preferred manner that could signal the next big trend in employment benefit offerings. The IRS ruling applies only to the company to which it was issued, but signals a potential willingness on the part of the IRS to change its policies and allow for widespread student loan assistance via matching contributions to employer-sponsored 401(k) plans.

The IRS Private Letter Ruling

The IRS private letter ruling (PLR 201833012) permitted an employer to amend its 401(k) plan in order to allow the employer to condition matching contributions to employees’ 401(k)s upon the employee making student loan repayments.  Under the proposed amendment, employees who contributed at least 2 percent of their pay toward student loan repayments became entitled to a 5 percent employer matching contribution to the 401(k).

In this case, student loan repayments were to be made via payroll deduction, or the employee was otherwise required to prove that he or she actually made the student loan payment.  Importantly, employees were not required to make a 401(k) contribution themselves in order to receive the matching contribution, reflecting the reality that many employees now must choose between repaying student loans and saving for retirement.

Importantly, the IRS ruled that the program did not violate the contingent benefit rule that applies to 401(k) plans.  The contingent benefit rule generally provides that an employer is not permitted to make employment benefits (such as health insurance or life insurance) contingent on an employee’s contributing to a 401(k) plan.  The employer matching contribution is an exception to this general rule, so that generally employers can make an employer matching contribution contingent on the employee making retirement plan contributions.

Under the plan described in the ruling, the employer offset a 401(k) matching contribution that it would have made based on the employee’s retirement plan contributions with the matching contribution based upon student loan repayment.

Potential Tax-Preferred Savings Strategy

The IRS ruling is important because it offers a potential tax-preferred method for employers to provide student loan repayment benefits.  The employer’s matching contribution to the plan is tax-free, and generally would not create any added costs for an employer that was making 401(k) matching contributions contingent on the employee’s retirement plan contributions.

If the employer were to simply provide the employee with additional compensation in order to make student loan repayments, that compensation would be taxable income to the employee.  However, while the employee’s 401(k) contribution would reduce that employee’s taxable income, it is important to note that the student loan repayment itself must be made with after-tax dollars.

Further, it is possible that implementing this type of plan could negatively impact the ADP or ACP nondiscrimination tests that the employer is required to satisfy with respect to a traditional 401(k) plan, because the plan would likely encourage non-highly compensated employees to make student loan repayments rather than 401(k) contributions.  These nondiscrimination testing requirements are generally imposed in order to ensure that employer-sponsored retirement plans do not disproportionately benefit highly compensated employees (i.e., owner-employees of a small business).


While it is important to note that the IRS private letter ruling cannot be relied upon as precedent for other employers seeking to implement a student loan repayment program that is similarly linked to 401(k) matching contributions, private letter rulings often signal the IRS’ attitudes toward a particular situation.  Therefore, it is possible that this ruling could signal the next trend in student-loan related employment benefits.

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