White Papers

Student Loan Benefit Program

May 24, 2019

This white paper examines IRS Private Letter Ruling (PLR 201833012), issued May 22, 2018. In the PLR, the IRS ruled that a student loan repayment (“SLR”) program included in an employer-sponsored 401(k) plan did not violate the “contingent benefit” prohibition of Code Section 401(k)(4)(A). Under the program, employees received employer contributions that were conditioned on making student loan repayments (“SLR nonelective contributions”) in lieu of receiving regular matching contributions under the plan. Employers may want to adopt an SLR program in order to attract and retain employees with outstanding student loans, who may lack the funds to make 401(k) contributions and receive employer matching contributions.

A PLR may be relied upon only by the taxpayer to whom it was issued. For that reason, an employer that is considering whether to add this type of provision to its 401(k) plan should consult with outside counsel regarding the pros and cons of such a provision and the advisability of seeking its own private letter ruling.

The PLR does not describe the mechanics or operation of the student loan benefit program. For example, it does not disclose the types of student loans that were considered eligible under the program or the method of making or tracking the loan repayments to the lender. Employers will want to discuss the internal structure of any student loan benefit program with outside counsel. For example:
  •  Will only loan repayments made via payroll deduction be eligible for SLR nonelective contributions, or will loan repayments made outside of payroll deduction also be eligible?
  • What administrative processes are required to set up loan repayments by payroll deduction or to administer loan repayments outside of payroll deduction?
It is also important to note that the IRS did not rule on any aspect of the program other than the impact of the contingent benefit rule. Many additional factors should be considered in deciding whether to adopt such a program, some of which are discussed in this document. However, employers are strongly encouraged to seek outside counsel before proceeding.

Below are the details of the SLR program that was described in the PLR noted above. While variance from this specific design may be permissible, employers are strongly encouraged to consult with outside counsel to the extent material changes from the below will be made.

SLR Program Contributions

  • Employees enrolled in the SLR program are eligible for SLR nonelective contributions and “true up” matching contributions
  • Employer makes an SLR nonelective contribution equal to 5% of the employee’s eligible pay-period compensation for each pay period in which the employee makes a student loan repayment at least equal to 2% of the employee’s compensation for that pay period
  • SLR nonelective contribution is made without regard to whether the employee makes any elective contributions to the plan throughout the year
  • SLR nonelective contribution is made as soon as practicable after the end of the plan year
  • Employer makes a “true up” matching contribution equal to 5% of eligible pay period compensation for each pay period an enrolled employee does not make a student loan repayment of at least 2% of compensation but does make an elective contribution of at least 2% of compensation
  • SLR true-up matching contribution is made as soon as practicable after the end of the plan year
  • Only employees employed on the last day of the plan year (or not employed due to death or disability) receive the SLR nonelective contribution or the SLR true-up matching contribution

Vesting

  • Both the SLR nonelective contribution and the SLR true-up matching contribution are subject to the same vesting as the regular match,
    •  We recommend that the SLR nonelective contribution provisions be added by using the non-safe harbor allocation method with each participant in his/her own classification. This will allow the employer to make other nonelective contributions in addition to the SLR nonelective contribution if desired. If this is a change from the plan’s current nonelective allocation formula, the timing of when this change can be effective may be limited to the next plan year versus the current plan year depending upon the plan’s current allocation requirements and whether a participant has already accrued a right to the nonelective contribution formula in the current plan year.
Vesting: In the PLR, the SLR nonelective contribution and the SLR true-up match were subject to the same vesting schedule as the regular employer match. While this is likely not a critical element in the PLR, it makes sense that all three types of contributions be subject to the same vesting schedule. However, due to the design of Newport Group’s document, the SLR nonelective contribution vesting schedule will need to be the same as the vesting schedule applicable to any other nonelective contributions under the plan, and the SLR matching contribution vesting schedule will need to be the same as the vesting schedule applicable to other matching contributions under the plan. Also, changes to vesting schedules may result in an impermissible vesting amendment or a cut-back of a protected benefit (see below).

Elective Deferrals: The current salary deferral election process contained in the plan will still apply.
  •  Plan document changes:
    • Does the plan have a minimum deferral percentage? If yes, you will need to consider this minimum in your design of the SLR program.
    •  Review the timing of when a participant can modify his/her salary deferral election by referring to the Administrative Procedures included with the Adoption Agreement. Those procedures should permit a participant to revoke a salary deferral election at any time, effective on the next prospective pay period.
Safe Harbor 401(k) Plan: The PLR did not involve a plan with a safe harbor match feature. Because safe harbor contributions would need to be made to all employees whether or not they are enrolled in the SLR program, it is likely not possible to add an SLR provision designed similarly to the plan in the PLR in a safe harbor plan.

Employer Match and SLR True Up Match: Changes to the eligibility provisions applicable to the regular employer match must be modified to exclude from eligibility employees who have enrolled in the SLR program. To exclude these participants, Box 3 of Item 13.j. should be checked and appropriate language added to provide for those exclusions. Also consider whether highly compensated employees (HCEs) will be excluded from receiving the SLR match. Additionally, Item 28.F.y. should be checked adding an additional match as an addendum to the adoption agreement, and box 1 should be completed to exclude from the an additional match employees not enrolled in the SLR program. Note that the SLR match is not a true-up match in the traditional sense, and so Item 28.G.z. of the addendum should not be marked. Under the SLR program, the SLR match is a true up match only in the sense that it is not deposited until after the end of the plan year. Draft allocation conditions to include a last day of employment requirement for the SLR match, if desired.

SLR Nonelective Contribution: Calculations of the SLR nonelective contribution can be made each payroll period, which would be the preferred method if the participant decides to opt-out or change their salary deferral election throughout the year. The employer is responsible for calculating these contributions each payroll period and funding at the end of the year. The calculation or verification of these contributions are outside of Newport Group’s service agreement.
  • Plan document change: If the plan sponsor is providing a nonelective contribution, a review of the formula and allocation conditions are required. The manner in which the document can provide for only an SLR nonelective contribution or a combination of SLR nonelective and regular nonelective contributions is to change the formula to a non-uniform allocation with each participant in their own rate group and remove any allocation conditions. This will allow the employer to contribute its normal nonelective contribution and then add on to this the SLR nonelective contribution for those who have an SLR election.

Other Considerations

  • Nondiscrimination testing for SLR nonelective contribution: Whether the employer makes only the SLR nonelective contribution or a combination of the SLR nonelective contribution and the regular nonelective contribution, those contributions must be tested for nondiscrimination if any HCEs receive such contributions. Additional annual compliance charges will apply if testing is required. Newport Group strongly encourages a projected nondiscrimination test of the SLR nonelective contribution if the contribution will be allocated to any HCEs. This projected nondiscrimination testing is also recommended to those employers who are currently using a non-uniform allocation method to determine the effects of the SLR nonelective contribution would have on the regular nonelective contributions. Compensation for testing purposes would still be the applicable Plan Compensation or 415 Compensation for the nonelective contribution feature.
  • Nondiscrimination testing for SLR match: The SLR match will be combined with the regular match and tested under a single Actual Contribution Percentage (ACP) test. However, the SLR match will likely result in some employees receiving a different rate of match throughout the year than other employees, and differences in the rate of match is a benefit, right or feature that will require additional discrimination testing, for which additional charges will apply.
  • Coverage testing: If the only nonelective contribution being provided under the plan is the SLR nonelective contribution and those receiving the SLR nonelective contribution are nonhighly compensated employees (NHCEs), the coverage test is deemed to pass. However, if any participant receiving the SLR nonelective contribution is a highly compensated employee (HCE), then the plan may have difficulty in passing this test. Below is a quick way to determine if the Coverage Test will pass under the Ratio Percentage Test if an SLR program is added to the plan:
 
   

 
  • Timing of funding the SLR nonelective and match contributions: Funding of the SLR nonelective and match contributions is made after the end of the year.
  • Annual testing: Annual testing is provided after the close of the plan year for full service clients. The issues testing could cause have been outlined in the various sections above.
  • Census file: If the plan offers an SLR program, Newport Group cannot calculate or verify the employer match or any SLR nonelective or regular nonelective contributions. Any testing will be done on the amount of each contribution provided on the annual census.
  • Annual testing:
    • SLR nonelective contribution tested as a nonelective contribution (not included in the ACP test with employer match)
    • Regular match AND “true-up match” are tested as a matching contributions (included in the ACP test)
  • Can a 403(b) plan allow for an SLR? At this time the PLR issued by the IRS does not reference a 403(b).

Find Out More: If you are interested in adding an SLR program to your plan, Newport Group can
assist with suggested changes to plan document language, and preliminary testing to determine the impact of the design on Newport Group services and fees. If you intend to work with outside counsel to apply for your own Private Letter Ruling, Newport Group can also help ensure the proposed plan design can be accommodated using Newport Group’s pre-approved document.





Newport Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions. 20190517-846295-2570833
 

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Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and Newport Group Consulting, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and Newport Group Consulting, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment advisers. When offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer. Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.