In a recent private letter ruling (PLR), the Internal Revenue Service (IRS) approved an innovative employee benefit program that helps employees pay off their student loan debt through a 401(k) plan.

PLRs apply only to a single taxpayer's facts and circumstances and as such are not precedential. Nonetheless, the PLR may provide a template for employers seeking to implement similar programs.

In requesting the PLR, the employer sought approval to offer a voluntary student loan benefit program, through which the employer makes a nonelective 401(k) plan contribution on behalf of an employee conditioned on the employee making student loan repayments (SLRs).

Under the student loan benefit program, the PLR explains, "if an employee makes a student loan repayment during a pay period equal to at least two percent of the employee's eligible compensation for the pay period, then Taxpayer will make an SLR nonelective contribution as soon as practicable after the end of the year equal to five percent of the employee's eligible compensation for that pay period."

The SLR nonelective contribution aligns with the 401(k) plan's regular five percent matching contribution for employees who make 401(k) elective contributions of at least two percent of eligible compensation for the pay period. The SLR nonelective contribution, however, is made whether or not the employee makes any elective contribution during the year. "If the employee does not make a student loan repayment for a pay period equal to at least two percent of the employee's eligible compensation, but does make an elective contribution during that pay period equal to at least two percent of the employee's eligible compensation for that pay period, then Taxpayer will make a matching contribution as soon as practicable after the end of the plan year equal to five percent of the employee's eligible compensation for that pay period [as a true-up matching contribution]."

Based on the facts presented, the IRS found that the SLR nonelective contributions under the program do not violate the "contingent benefit" rule of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations because the SLR nonelective contributions are not conditioned (directly or indirectly) on the employee's election to make (or not make) elective contributions. The ruling is based on the assumption that the employer will not extend any students loans to employees eligible for the student loan benefit program.

The student loan benefit program is an innovative way for employers to provide student loan assistance in a tax-favored manner. Currently, employer-provided repayment assistance generally consists of employer payments directly toward the loan balance, resulting in taxable income to the employee (although there are legislative proposals that would change this). In contrast, the SLR nonelective contribution receives the favorable tax-deferred treatment of any other nonelective 401(k) plan contribution, subject of course to applicable tax-qualification requirements (including nondiscrimination testing).    

The four-page PLR issued by the IRS is posted here.

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