The IRS recently issued Private Letter Ruling (PLR) 131066-17 providing guidance on student loan repayment programs as a plan design feature of a 401(k) plan. FIS Relius has since received numerous requests about the PLR and whether we will provide a plan document amendment to support student loan repayment programs in FIS Relius preapproved plans. The short answer is no, we won’t be providing such an amendment. A PLR is not considered a change in law that warrants an interim good-faith amendment. In addition, in many cases, a student loan repayment program can be accommodated within existing plans without the need of a separate amendment that might affect an employer’s reliance on an IRS approval letter.

The PLR, which applies to only the employer requesting the ruling, had a rather unique fact pattern. In general, employees could enroll in a student loan benefit program and receive an employer nonelective contribution in lieu of the plan’s normal matching contribution, provided a participant’s student loan repayments were at least 2% of pay period compensation and the individual was employed at the end of the plan year. A participant would still be entitled to make elective deferrals to the plan and would still be entitled to the regular matching contribution should the student loan repayments be less than 2% of pay period compensation.  

The PLR only addressed the very narrow issue, of whether the program violated the contingent benefit rule of IRC §401(k)(4)(A). That rule provides that a plan cannot condition a benefit, other than a matching contribution, on whether an employee makes elective deferral. The ruling provides that student loan repayments are not elective deferrals and therefore the employer nonelective contribution was not being conditioned on whether an employee made an elective deferral. There are two important items to note about this. First, many providers had already reached a similar conclusion (i.e., this is not the first student loan repayment program). But there may have been concern with this arrangement because of the replacement of the plan’s regular matching contribution with this other self-selected "match". Second, because a student loan repayment is not an elective deferral, it means that any employer contribution based on the repayment is not a matching contribution for purposes of IRC §401(m). That is why the employer contribution in the PLR was characterized as a nonelective contribution.

There are numerous ways to structure a student loan repayment program. If the employer is only making a nonelective contribution for some participants (e.g., those repaying student loans), then most documents already accommodate such a design. The employer can simply select the option to have each participant in his or her own allocation group and then the employer has discretion to determine the contribution for each participant. When that design is specified, the nonelective contributions for the borrower-participants might be the only employer contribution, or it might be in addition to the "formula" contribution the employer might otherwise have made (such as a pro-rata allocation). The fact that the contribution is determined based on a student loan repayment is not relevant for plan document purposes, although the employer would need to communicate to participants how contributions are determined (e.g., modify the summary plan description). In lieu of electing to have each participant in a separate allocation group, many preapproved plans have an “other” or “describe” option for a nonelective contribution. For most of these plans, completing the option with a description of a contribution based on a student loan repayment program would not violate the parameters associated with the option. 

If the student loan repayment program is structured in a manner similar to the arrangement described in the PLR, then it’s much more difficult to fit within a preapproved plan, but that’s not to say it’s impossible. One would still need to complete the nonelective contribution section of the plan as stated above. In addition, the matching contribution of the plan would need to be addressed. Most preapproved plans also have an “other” or “describe” option for a matching contribution. The matching contribution would need to state that the match is 0% for those who meet the criteria for the nonelective contribution. Some providers have asked whether this should be handled in the definition of eligible employees, but at least with the approach of the PLR, the employees are eligible for the match. It’s similar to an allocation condition that one be employed at the end of the year. The individual is eligible for the matching contribution but might not be benefiting based on the circumstances at the end of the year. 

The "Cycle 3" restatement

The submission deadline for the next restatement cycle for preapproved plans is December 31, 2018. We will include specific options to address student loan repayment programs and it will then be up to the IRS as to whether they will permit such options in preapproved plans (we don’t expect approval of these plans until around 2020). It would helpful to us if you could provide us with any unique student loan repayment program designs that we should consider including with the submission (the sooner, the better).  The document review staff at the IRS is no doubt expecting to see document providers providing some creative designs for student debt relief, and you should be prepared for the possibility that they may hold off on determining the permissibility of such features until well into the review process.

It’s beyond the scope of this article to get into the issues not addressed in the PLR. These include the administration of the program (i.e., verification of student loan repayments) and issues relating to the nondiscrimination requirements. We are only focusing on the impact on plan documents and have omitted the many testing and administrative issues that surround the design of the plan that was the subject of the PLR. (The devil, in this case, is in the details.)

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