On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022. Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming.
Current State of the Law
The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs. In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.
In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments. Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program. Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability. The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.
The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.” Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals. The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.
Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.
Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement. As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0. Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments. “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses. Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).
What Future IRS Guidance Might Hold
Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:
- Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
- Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
- Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
- Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.
Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.
Photo credit: Mohammad Shahhosseini, Unsplash
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.