Submitted by Ali Law Group PC on
Recently, employer Abbott Labs announced the introduction of a proposed program which would amend its defined contribution plan to include a student loan benefit for its employees. The program would allow for employer-provided student loan repayment benefits offered through Abbott Labs’ 401(k) plan. On Friday, August 17, 2018, the IRS released a private letter ruling (PLR) regarding the proposal, concluding that the program, as proposed, would not violate the “contingent benefit” prohibition under the Internal Revenue Code of 1986, as amended (the “Code”), and related regulations.
As proposed, the program would enable all Abbott employees to be eligible to enroll in a voluntary student loan benefit program under the employer’s defined contribution plan, which includes a cash or deferred arrangement under Code section 401(k). If an employee enrolls in the program and makes a student loan repayment equal to 2% or more of his eligible compensation for a pay period, the employer will make a non-elective contribution to the plan equal to 5% of the employee’s compensation for that period. An employee who enrolls in the program can opt out at any time and if an enrolled employee does not make a qualifying student loan repayment but makes an elective contribution to the plan of at least 2%, the employer will make a matching contribution of up to 5% for that pay period.
Pursuant to Section 401(k), plans must satisfy the “contingent benefit rule” to qualify for favorable tax treatment. The rule prohibits an employer from conditioning benefits such as welfare benefits, stock options and other types of compensation on an employee’s decision to contribute to 401(k) contributions. The exception to this rule is where the employer matches contributions.
In the instant case, the IRS held that the program’s student loan contributions fall within the exception to the rule, finding that the program will not violate the contingent benefit prohibition, based on the following factors:
- the non-elective contribution under the program is not itself conditioned on the employee making, or not making, elective contributions to the plan,
- because an employee may make elective contributions in addition to student loan repayments, the non-elective contribution is not contingent on the employee electing to make or not make elective contributions in lieu of receiving cash, and
- the plan sponsor will not extend any student loans to employees that will be eligible for the program.
The decision confirms that such arrangements are permissible in certain circumstances. In light of ruling, employers may consider offering the student loan benefit and should review their 401(k) plans and the IRS rules to accommodate such programs.