As the economy has improved, organizations and their human resources departments have been forced to retool and refocus – thinking more about how to improve their benefits package; thinking about how to recruit and retain top talent. In doing so, many human resources departments have considered benefits beyond the more traditional health and retirement perks. One benefit that has recently become top of mind is student loan repayment programs.[1]
The need? According to a study from Prudential, at the end of 2016, Americans had $1.31 trillion in student loans outstanding, which was increased from $481 billion just 10 years earlier.[2]
The solution? While there are a variety of student loan repayment programs available for employers to offer their employees, one student loan repayment program recently received support from the Internal Revenue Service (IRS).
In mid-August, the IRS issued a Private Letter Ruling (PLR)[3] to an organization that utilized a student loan repayment program. Under the program, “if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then [the employer] will make [a student loan repayment] non-elective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period.”[4]
The IRS said that this particular program did not violate the “contingent benefit” rule because the student loan repayment non-elective contributions under the program are not conditioned on the employee making elective contributions under a cash or deferred arrangement. Also, employees are allowed to make both student loan repayments and elective contributions – thus no violation of the contingent benefit rule.[5]
Future Considerations? This PLR may pave the way for other employers that sponsor both 401(k) and 403(b) plans to look to student loan repayment programs as a new employee benefit to attract and retain talent. However, companies will likely want to keep in mind that the IRS guidance is only a PLR, meaning it is a written determination issued to a particular employer based on a specific set of facts.[6] PLRs are helpful guidance but cannot truly be relied upon by any employer other than the employer for which it was issued. However, given the perceived demand for this benefit, it seems likely that further guidance from the IRS or legislation will follow in the coming months.
Additionally, for employers that seek to implement student loan repayment programs in the interim, consider the following:
- Taxation. How could the program’s construction impact taxation of employees? If set-up improperly, employees may incur an unintended tax consequence.
- Nondiscrimination testing. How might a student loan repayment program impact nondiscrimination testing?
- Recordkeeper’s Capabilities.Who will offer the student loan repayment benefit and how will that integrate with the current recordkeeper and other service providers to the retirement plan?
- Practical Considerations. In addition to the recordkeeper integration, what other hurdles exist for implementation, including participant communication strategy, operationalizing the change in payroll, and others?
- Guidance.What legal support is necessary to proceed with the proposed program and is further legislation and/or IRS support required first?
- Plan Document.What changes need to be made to the plan document before proceeding?
To get started discussing these questions and others related to student loan repayment programs (and similar benefits), contact a Multnomah Group consultant.
Notes:
[1] Previously discussed on the Multnomah Group blog here: http://blog.multnomahgroup.com/forward-thinking/participant-faq-series-student-loan-repayment.
[2] See, Prudential, Student Loan Debt, available at: https://www.prudential.com/media/managed/documents/rp/Prudential-Student-Loan-Brochure-2017.pdf.
[3] IRS, Private Letter Ruling, available at: https://www.irs.gov/pub/irs-wd/201833012.pdf.
[4] IRS, Private Letter Ruling, available at: https://www.irs.gov/pub/irs-wd/201833012.pdf.
[5] IRS, Private Letter Ruling, available at: https://www.irs.gov/pub/irs-wd/201833012.pdf.
[6] See, Rev. Proc. 2017-01; available here: https://www.irs.gov/irb/2017-01_IRB#RP-2017-1.
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Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.