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.