What You Need to Know About the IRS Ruling on 401(k) Matches for Student Loan Repayments

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For millions of people in this country saddled with student loan debt, saving for retirement or paying down debt is an either-or decision. A new IRS ruling may help employees faced with such a dilemma accomplish both goals in the future.

What it is

The IRS issued a private ruling on Aug. 17 to allow an unnamed company to implement a new type of benefit for student loan borrowers within its 401(k) plan. This company submitted a ruling proposal last year in order to help its employees tackle education debt.

Under the current plan, if a worker contributes at least 2% of their income to a company-sponsored retirement account, the employer will make a 5% match contribution.

The company proposed to amend the plan by allowing workers to opt into a student loan repayment program. As long as employees can prove that they are paying at least 2% toward student loan debt, the company will make a 401(k) contribution equal to 5% of their salary to their retirement plan, even though they don’t actively contribute to their 401(k).

Why it’s an issue

Concerns have grown among employers in recent years that workers are not saving for retirement because of student loan debt. Many have looked into ways to include student repayment in their benefit offerings to not only incentivize employees to pay off debt while saving for retirement, but also to recruit and retain talent, according to Chatrane Birbal, director of government affairs at the Society for Human Resource Management (SHRM).

However, companies have a technical barrier to overcome in order to do so. Under the “contingent benefit” provision in the 401(k) tax code, employers generally cannot make benefits contingent on an employee making retirement contributions, with the exception of an employer-matching contribution, which is free money to employees.

“So you can’t say, ‘If you don’t defer at least 3%, you don’t get to sign up for health insurance or long-term disability,’” said Christine Roberts, a Santa Barbara, Calif.-based attorney practicing employment benefits law. “The exception to the contingent benefit rule is the free match. You have to defer to get the free match money.”

Jeffrey Holdvogt, partner of Chicago-based law firm McDermott Will & Emery LLP, said it’s possible this employer filed a private letter ruling because there was some uncertainty over the ability to provide a retirement plan contribution that is directly contingent on an employee making student loan repayments.

But the IRS ruling cleared the company’s concern, stating that the proposed plan was a permitted contingent benefit.

“So basically what they said was, ‘You can treat the match that is based on the student loan repayment the same as a regular match, and it doesn’t violate the contingent benefit rule,’” Roberts said.

What it means for student loan borrowers

The IRS ruling is beneficial for employees in this company who have little or no ability to shunt money over to their 401(k) because of heavy student loan debt.

“They’re not losing free employer money just because they have to repay their student loans,” Roberts said.

Why it matters

Only 4% of American companies surveyed by SHRM indicate they offer student loan payment benefits, according to Birbal.

Although the specific ruling is limited to one company, oftentimes other employers look at these kinds of private letter rulings made public by the IRS as informal guidance on similar issues, Holdvogt said

Experts believe this particular ruling is likely to spur more interest and confidence in pushing forward with similar student repayment benefit programs among other employers.

What’s next

But because of the limited applicability of this specific ruling, Roberts said she doesn’t expect this practice to pick up widely just yet.

“The environment we’re in right now is that to be certain, employers would all have to get their own private letter ruling,” Roberts said. “If they have a very high-risk tolerance, they would copycat this, but they maybe would only match 50% or 100%. And if they’re cautious, but they can’t afford a private letter ruling, they wait for wider guidance.”

While it’s unclear whether and when the IRS will issue broader guidance for all employers on this matter, there is a lot of hope that such benefits will become the norm because of growing interest in this issue from employers and legislators, experts said.

“The fact that the IRS issued this private letter ruling, I think, makes it more likely that the IRS comes out with more guidance of general applicability,” Holdvogt added.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.