Student Loan Benefit Program | Newport

Student Loan Benefit Program | Newport

May 24, 2019

This white paper examines IRS Private Letter Ruling (PLR 201833012), issued May 22, 2018. In the PLR, the IRS dominated {that a} student loan reimbursement (“SLR”) program included in an employer-sponsored 401(okay) plan didn’t violate the “contingent benefit” prohibition of Code Section 401(okay)(4)(A). Under this system, workers acquired employer contributions that had been conditioned on making student loan repayments (“SLR nonelective contributions”) in lieu of receiving common matching contributions below the plan. Employers could need to undertake an SLR program with a purpose to appeal to and retain workers with excellent student loans, who could lack the funds to make 401(okay) contributions and obtain employer matching contributions.

A PLR could also be relied upon solely by the taxpayer to whom it was issued. For that motive, an employer that’s contemplating whether or not so as to add any such provision to its 401(okay) plan ought to seek the advice of with exterior counsel concerning the professionals and cons of such a provision and the advisability of looking for its personal personal letter ruling.

The PLR doesn’t describe the mechanics or operation of the student loan profit program. For instance, it doesn’t disclose the forms of student loans that had been thought of eligible below this system or the strategy of constructing or monitoring the loan repayments to the lender. Employers will need to focus on the inner construction of any student loan profit program with exterior counsel. For instance:

  •  Will solely loan repayments made by way of payroll deduction be eligible for SLR nonelective contributions, or will loan repayments made exterior of payroll deduction even be eligible?
  • What administrative processes are required to arrange loan repayments by payroll deduction or to manage loan repayments exterior of payroll deduction?

It can also be essential to notice that the IRS didn’t rule on any facet of this system apart from the influence of the contingent profit rule. Many extra components must be thought of in deciding whether or not to undertake such a program, a few of that are mentioned on this doc. However, employers are strongly inspired to hunt exterior counsel earlier than continuing.

Below are the small print of the SLR program that was described within the PLR famous above. While variance from this particular design could also be permissible, employers are strongly inspired to seek the advice of with exterior counsel to the extent materials adjustments from the beneath can be made.

SLR Program Contributions

  • Employees enrolled within the SLR program are eligible for SLR nonelective contributions and “true up” matching contributions
  • Employer makes an SLR nonelective contribution equal to five% of the worker’s eligible pay-period compensation for every pay interval by which the worker makes a student loan reimbursement a minimum of equal to 2% of the worker’s compensation for that pay interval
  • SLR nonelective contribution is made with out regard as to if the worker makes any elective contributions to the plan all year long
  • SLR nonelective contribution is made as quickly as practicable after the tip of the plan 12 months
  • Employer makes a “true up” matching contribution equal to five% of eligible pay interval compensation for every pay interval an enrolled worker doesn’t make a student loan reimbursement of a minimum of 2% of compensation however does make an elective contribution of a minimum of 2% of compensation
  • SLR true-up matching contribution is made as quickly as practicable after the tip of the plan 12 months
  • Only workers employed on the final day of the plan 12 months (or not employed because of demise or incapacity) obtain the SLR nonelective contribution or the SLR true-up matching contribution
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Vesting

  • Both the SLR nonelective contribution and the SLR true-up matching contribution are topic to the identical vesting because the common match,
    •  We advocate that the SLR nonelective contribution provisions be added through the use of the non-safe harbor allocation methodology with every participant in his/her personal classification. This will enable the employer to make different nonelective contributions along with the SLR nonelective contribution if desired. If it is a change from the plan’s present nonelective allocation formulation, the timing of when this alteration might be efficient could also be restricted to the following plan 12 months versus the present plan 12 months relying upon the plan’s present allocation necessities and whether or not a participant has already accrued a proper to the nonelective contribution formulation within the present plan 12 months.

Vesting: In the PLR, the SLR nonelective contribution and the SLR true-up match had been topic to the identical vesting schedule because the common employer match. While that is probably not a vital ingredient within the PLR, it is sensible that every one three forms of contributions be topic to the identical vesting schedule. However, because of the design of Newport Group’s doc, the SLR nonelective contribution vesting schedule will must be the identical because the vesting schedule relevant to another nonelective contributions below the plan, and the SLR matching contribution vesting schedule will must be the identical because the vesting schedule relevant to different matching contributions below the plan. Also, adjustments to vesting schedules could end in an impermissible vesting modification or a cut-back of a protected profit (see beneath).

Elective Deferrals: The present wage deferral election course of contained within the plan will nonetheless apply.

  •  Plan doc adjustments:
    • Does the plan have a minimal deferral proportion? If sure, you’ll need to contemplate this minimal in your design of the SLR program.
    •  Review the timing of when a participant can modify his/her wage deferral election by referring to the Administrative Procedures included with the Adoption Agreement. Those procedures ought to allow a participant to revoke a wage deferral election at any time, efficient on the following potential pay interval.

Safe Harbor 401(okay) Plan: The PLR didn’t contain a plan with a protected harbor match characteristic. Because protected harbor contributions would must be made to all workers whether or not or not they’re enrolled within the SLR program, it’s probably not potential so as to add an SLR provision designed equally to the plan within the PLR in a protected harbor plan.

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Employer Match and SLR True Up Match: Changes to the eligibility provisions relevant to the common employer match should be modified to exclude from eligibility workers who’ve enrolled within the SLR program. To exclude these individuals, Box 3 of Item 13.j. must be checked and applicable language added to offer for these exclusions. Also take into account whether or not extremely compensated workers (HCEs) can be excluded from receiving the SLR match. Additionally, Item 28.F.y. must be checked including a further match as an addendum to the adoption settlement, and field 1 must be accomplished to exclude from the a further match workers not enrolled within the SLR program. Note that the SLR match shouldn’t be a true-up match within the conventional sense, and so Item 28.G.z. of the addendum shouldn’t be marked. Under the SLR program, the SLR match is a real up match solely within the sense that it’s not deposited till after the tip of the plan 12 months. Draft allocation circumstances to incorporate a final day of employment requirement for the SLR match, if desired.

SLR Nonelective Contribution: Calculations of the SLR nonelective contribution might be made every payroll interval, which might be the popular methodology if the participant decides to opt-out or change their wage deferral election all year long. The employer is liable for calculating these contributions every payroll interval and funding on the finish of the 12 months. The calculation or verification of those contributions are exterior of Newport Group’s service settlement.

  • Plan doc change: If the plan sponsor is offering a nonelective contribution, a overview of the formulation and allocation circumstances are required. The method by which the doc can present for under an SLR nonelective contribution or a mixture of SLR nonelective and common nonelective contributions is to alter the formulation to a non-uniform allocation with every participant in their very own price group and take away any allocation circumstances. This will enable the employer to contribute its regular nonelective contribution after which add on to this the SLR nonelective contribution for individuals who have an SLR election.

Other Considerations

  • Nondiscrimination testing for SLR nonelective contribution: Whether the employer makes solely the SLR nonelective contribution or a mixture of the SLR nonelective contribution and the common nonelective contribution, these contributions should be examined for nondiscrimination if any HCEs obtain such contributions. Additional annual compliance fees will apply if testing is required. Newport Group strongly encourages a projected nondiscrimination check of the SLR nonelective contribution if the contribution can be allotted to any HCEs. This projected nondiscrimination testing can also be really useful to these employers who’re at present utilizing a non-uniform allocation methodology to find out the consequences of the SLR nonelective contribution would have on the common nonelective contributions. Compensation for testing functions would nonetheless be the relevant Plan Compensation or 415 Compensation for the nonelective contribution characteristic.
  • Nondiscrimination testing for SLR match: The SLR match can be mixed with the common match and examined below a single Actual Contribution Percentage (ACP) check. However, the SLR match will probably end in some workers receiving a distinct price of match all year long than different workers, and variations within the price of match is a profit, proper or characteristic that can require extra discrimination testing, for which extra fees will apply.
  • Coverage testing: If the one nonelective contribution being supplied below the plan is the SLR nonelective contribution and people receiving the SLR nonelective contribution are nonhighly compensated workers (NHCEs), the protection check is deemed to move. However, if any participant receiving the SLR nonelective contribution is a extremely compensated worker (HCE), then the plan could have problem in passing this check. Below is a fast solution to decide if the Coverage Test will move below the Ratio Percentage Test if an SLR program is added to the plan:
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  • Timing of funding the SLR nonelective and match contributions: Funding of the SLR nonelective and match contributions is made after the tip of the 12 months.
  • Annual testing: Annual testing is supplied after the shut of the plan 12 months for full service shoppers. The points testing might trigger have been outlined within the varied sections above.
  • Census file: If the plan provides an SLR program, Newport Group can not calculate or confirm the employer match or any SLR nonelective or common nonelective contributions. Any testing can be carried out on the quantity of every contribution supplied on the annual census.
  • Annual testing:
    • SLR nonelective contribution examined as a nonelective contribution (not included within the ACP check with employer match)
    • Regular match AND “true-up match” are examined as an identical contributions (included within the ACP check)
  • Can a 403(b) plan enable for an SLR? At this time the PLR issued by the IRS doesn’t reference a 403(b).

Find Out More: If you have an interest in including an SLR program to your plan, Newport Group can
help with recommended adjustments to plan doc language, and preliminary testing to find out the influence of the design on Newport Group providers and charges. If you plan to work with exterior counsel to use to your personal Private Letter Ruling, Newport Group may also assist make sure the proposed plan design might be accommodated utilizing Newport Group’s pre-approved doc.

Newport Group and its associates don’t present tax, authorized or accounting recommendation. This materials has been ready for data functions solely, and isn’t supposed to offer, and shouldn’t be relied on for, tax, authorized or accounting recommendation. You ought to seek the advice of your individual tax, authorized and accounting advisors earlier than making any choices. 20190517-846295-2570833