The IRS PLR on Student Loan Benefits in 401(k) Plans is Much Ado About Not Much

The IRS PLR on Student Loan Benefits in 401(ok) Plans is Much Ado About Not Much

We interrupt your frequently scheduled programming to spotlight the IRS’ not-so-ground-breaking entrance into the world of student loan advantages in 401(ok) plans.

The ever-growing mountain of student loan debt has been on the minds of everybody from high-schoolers attempting to pick a university to graduates attempting to resolve the place they will afford to dwell to politicians who wish to be seen as fixing the issue.  Some bigger firms have even carried out student loan forgiveness advantages to assist appeal to prime expertise in a good labor market.

The IRS entered the fray on Friday (August 17, 2018) when it revealed Private Letter Ruling 201833012 coping with the interaction of student loan advantages and 401(ok) plans.  We have already seen numerous articles with headlines that counsel the PLR has created some new rule to pave the way in which for 401(ok) plans to incorporate these added advantages.  Unfortunately, on first blush, it appears to be like like a lot ado about nothing.


The firm that requested the ruling had a 401(ok) plan that offered an identical contribution equal to five% of pay for any worker who contributed a minimum of 2% of pay, decided on a pay-by-payroll foundation.  It is a bit convoluted to comply with, however their proposal was to amend the plan so as to add a particular student loan profit as follows:

  • Separate enrollment: Plan contributors with excellent student loans may signal as much as obtain the separate student loan profit.  That sign-up could be separate from the common plan enrollment.
  • Nonelective contribution: For those that enroll and make funds on their student loans in an quantity equal to a minimum of 2% of their compensation, the corporate would make a nonelective contribution (a/ok/a revenue sharing) equal to five% of compensation.
  • True-up match: Those staff enrolled within the particular profit who didn’t make the required minimal loan funds, however who did defer a minimum of 2% into the 401(ok) plan, would obtain a so-called “true-up” match utilizing the identical formulation because the common match, i.e. 5% of pay.
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Although calculated on a pay interval foundation, neither the student loan profit nor the true-up match could be funded till after the shut of the yr, and contributors could be required to be employed on the final day of the yr to really obtain both profit.

The Issue and the Ruling

There is a little-known rule within the Tax Code referred to as the contingent profit rule.  In quick, it says that that the one profit in a certified plan that may be conditioned on a participant making 401(ok) deferrals is an identical contribution.  As an instance, meaning it might not be acceptable to require a participant to make 401(ok) deferrals with a view to obtain a profit-sharing contribution.

The firm looking for the PLR needed affirmation from the IRS that its student loan profit wouldn’t violate that contingent profit rule.  Unsurprisingly, the IRS dominated that the profit, as proposed, wouldn’t run afoul of that rule.  We say it’s unsurprising as a result of no a part of the student loan profit is predicated on whether or not or how a lot an worker defers.

Nothing To See Here

The PLR doesn’t break new floor, present any new interpretations, or create any new legal guidelines or plan design alternatives.  It solutions simply the one easy query.  With that stated, the idea of a student loan profit inside a company-sponsored plan is a novel one.  Let’s check out how the proposal from the ruling may play out in observe.  After all, simply because an idea is authorized doesn’t all the time imply it’s sensible.

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Nondiscrimination testing is the large subject right here.  As a common rule, each sort of contribution a plan offers is topic to the minimal protection check to make sure that sufficient non-highly compensated staff are eligible to obtain it.  Since most extremely compensated staff are unlikely to have student loans, most people benefitting are prone to be non-HCEs, placing this design within the clear on the protection check.

But what concerning the different nondiscrimination exams?  The student loan profit replaces the corporate match for these contributors who enroll and make the requisite loan funds.  Since matching contributions are topic to the ACP check and the loan profit successfully reduces or eliminates the matching contributions made for non-HCEs, this design has the potential to trigger the ACP check to fail.

Moving past nondiscrimination testing, we’d be remiss if we didn’t additionally point out the plan doc.  Prototypes and different plan paperwork which are pre-approved by the IRS are unlikely to have the ability to accommodate designs like this.  That means the corporate must interact an legal professional to draft a personalized plan doc that comes with all the required wording.  That is usually a very costly proposition, and for the reason that IRS has cutback on which forms of personalized paperwork for which it would subject dedication letters, sponsors could also be left with plan provisions that will or will not be acceptable however with none strategy to know for positive.

For Your…er…Their Eyes Only

It is vital to notice that whereas a PLR could be illustrative of the IRS’ thought course of, it’s based mostly on the particular information outlined within the request and is simply binding on the social gathering doing the requesting.  A PLR doesn’t set precedent and can’t be cited by different taxpayers in assist of their very own reasoning.  So, simply because the IRS dominated that this specific student loan profit doesn’t violate the contingent profit rule, that doesn’t imply that different forms of student loan advantages inside 401(ok) plans would robotically be acceptable.  With the price of a PLR tipping the scales at 5 figures, that isn’t going to be a viable choice for many companies.

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