Here’s what you need to know about the practice and the IRS decision:
The Plan:
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The IRS ruling allows for an employer non-elective 401(k) contribution to equal 5% of an employee’s salary pretax if that employee was using 2% or more of their pay on student loan repayments.
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Employees would not make elective deferrals through their 401(k), but would have to provide documentation of the loan payments to the employer.
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Employees do not have to make any contribution to their 401(k) to receive the nonelective contribution. However, if the employee did elect a 401(k) contribution, they would not be eligible for the plan’s normal matching contribution while participating in the student loan repayment program.
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All 401(k) plan eligibility and vesting rules remained the same whether receiving the nonelective contribution or not.
The Ruling:
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The IRS ruled that this plan design did not violate the “Contingent benefit” rule, a regulation which prohibits employers from offering a benefit which is contingent on an employee making elective contributions to a 401(k).
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The plan got a green light since the benefit (a nonelective contribution) was based on student loan repayments, not elective contributions, and employees could still make elective contributions if they chose to.
Do you have questions about how student loan repayment plans work? Are you ready to implement one in your organization? Contact your Fall River Client Manager, who can connect you with industry experts who can help you design your program!
