In a recently released private letter ruling, the IRS addressed an employer seeking to offer a “student loan benefit program” as part of its 401(k) plan. Under this program, the employer would make nonelective contributions if the employee made student loan repayments. The program would be voluntary and after enrolling the employee could opt-out. If the employee enrolled in the student loan benefit program, the employee could still make elective contributions to the plan, but would not receive regular matching contributions with respect to those elective contributions (again, while participating in the student loan benefit program). If an employee later opts out of the program, the employee would resume his or her eligibility for regular matching contributions.
The IRS ruled that this type of program “would not violate the ‘contingent benefit’ prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6)” of the tax code. Under the contingent benefits rule, “an employer may not make other benefits, such as health insurance, stock options, or similar entitlements, contingent on a participant’s making elective deferrals under a 401(k) plan.” However, the IRS stated that because the employer’s 401(k) contributions are triggered by employees’ student loan repayments, it did not violate the contingent benefit rule.
It is important to note that private letter rulings may not be used or cited as precedent by anyone other than the Taxpayer that it was issued to. Nevertheless, the ruling provides guidance on drafting these policies and seeking IRS approval for them.
