Making Matching Contributions on Student Loan Payments

TStudent Loanhe Internal Revenue Service recently released Private Letter Ruling (PLR) 201833012 regarding the ability to make “matching” contributions to an employer’s 401(k) plan for participants enrolled in a student loan repayment program. Under the PLR, the plan allows participants enrolled in the student loan repayment program to receive a non-elective contribution that mimics the employer’s regular matching contribution on employee 401(k) contributions.  Employees enrolled in the student loan repayment program can still make 401(k) contributions, but will not receive matching contributions if they are receiving the non-elective contributions for student loan repayments.  If a participant enrolled in the student loan repayment program drops out of the program or does not make student loan repayments equal to the percentage of pay required to receive the full matching contribution, but does make 401(k) contributions, they will receive a true-up matching contribution to get them to the full employer contribution rate.  Essentially, the student loan repayments and the 401(k) contributions are combined to determine the amount of employer contribution, then split between the applicable non-elective contribution and matching contribution.

The non-elective contributions are still subject to coverage testing, contribution limits, and all other discrimination testing applicable to a qualified retirement plan under ERISA. As such, to assure there are no compliance issues on the non-elective contributions, they should be limited to non-highly compensated employees.

The purpose of a program such as this is to not penalize an employee that is unable to make 401(k) contributions due to their student loan repayment obligations. The company non-elective contribution allows the employee to not lose out on at least some accumulation in the 401(k) plan while they are repaying their student loans.  While it is a creative plan design, the compliance implications are very clear and the design is built upon the ability to pick and choose the employer contribution rate by employee as long as you can pass discrimination testing.

In the PLR, the non-elective contribution takes priority, with the true-up matching contribution being made after the end of the plan year. Participants making both student loan repayments and 401(k) contributions may not receive a match if their student loan repayments produce a non-elective contribution equal to the plan’s matching rate.  In our opinion, this is backwards and the match should be determined first with a true-up of the non-elective contribution.  Our reasoning is that first, a plan making safe-harbor matching contributions would not be able to deny the matching contribution to participants receiving the non-elective contribution if they make a 401(k) contribution in the same year.  Second, the matching contribution is subject to coverage testing and any non-highly compensated employee that does not receive a matching contribution because they are getting the student loan non-elective contribution will negatively impact the coverage testing.  This could have a material impact on the coverage test.  The non-elective contribution will not have the same coverage testing issue since it is limited to non-highly compensated employees.  If the non-elective contribution is not limited to non-highly compensated employees, the coverage issue could still exist for the matching contribution but would also present a coverage testing issue for the non-elective contribution.

From an administrative standpoint, making the matching contribution on the plan’s regular basis, then determining the student loan non-elective contribution at the end of the year would be less burdensome on the employer. It is up to each employer to determine the documentation requirements for the student loan payments.  These documentation requirements fall outside of the plan and ERISA.  Employers could ask for bank statements, transactions from the lender, or simply take an employee’s word for it.

From the plan perspective, the non-elective contribution does not need to be tied to student loan repayments. A Plan Sponsor could decide to make up missed matching contributions via a non-elective contribution for people that do not make 401(k) contributions due to child care costs, uninsured medical expenses, or any other reason.  All of these policies would lie outside of the plan but would be subject to the same compliance issues discussed above.

Please contact us if you like additional details or to discuss adding this benefit to yours or your client’s plan.