Is student debt sinking your benefits package? A new 401(k) hack could help
It is well known that young workers are facing unprecedented levels of student debt. This is particularly true in the nonprofit sector, where salaries can be lower and employees may still be paying off their student loans while in their 40s, and even older. One concern employers commonly hear: that employees cannot save for retirement and pay off student loans at the same time – many of whom are missing out on employer 401(k) matching contributions, thereby leaving significant money on the table.
Recently, the IRS published a private letter ruling – a kind of ruling that is not binding on the IRS, but may be indicative of the IRS’s thinking on a particular issue – which presents one employer's creative solution to this increasingly common problem. This ruling approves a special program within a 401(k) plan that allows employees making student loan repayments to be rewarded with contributions under their employer's 401(k) plan regardless of whether the employee contributes any of his or her own money.
Nonprofits planning to enhance their employee benefits packages may wish to work with legal counsel to structure a similar option as an enhancement to their own 401(k) plans.
The newly-approved 401(k) contribution structure
An employer requested a ruling asking whether the employer-sponsored 401(k) plan can be amended to add a new type of employer contribution. Under the proposed contribution structure, the employer would provide a non-elective contribution equal to 5 percent of an employee's compensation for a pay period if the employee makes student loan repayments equal to at least 2 percent of his or her compensation during the pay period. This new 401(k) contribution method, called an “SLR contribution,” is also subject to the following conditions:
The SLR contribution is available to all employees, but they must affirmatively elect to enter into the program;
For each pay period, employees are eligible to receive either the SLR contribution if they make student loan repayments, or regular matching contributions if they make salary deferral contributions, but not both;
Employees are not required to make their own salary deferral contributions to the plan to receive the SLR contribution, but they are free to do so;
The SLR contributions and matching contributions for the plan year are made shortly after the end of each plan year, and are calculated on a payroll-by-payroll basis, based on whether the participant made student loan repayments, salary deferral contributions, or neither, for each pay period; and
Employees may opt out of the program prospectively.
The SLR contribution would be similar in amount to the matching contributions already available under the plan. An important difference, however, is that employees are not required to contribute any money into the plan in order to receive the SLR contribution. Instead, the SLR contribution is based entirely on the amount of student loan repayments that an employee makes during a pay period.
The IRS ruling on SLR contributions
A key aspect of the IRS's reasoning for approving the SLR contribution is that eligibility for it is not based on whether a participant makes contributions to the plan. The Internal Revenue Code and IRS regulations prohibit 401(k) plan designs in which "other benefits" are conditioned on an employee's contributions to the plan. This new ruling was issued to a specific taxpayer, but we note that other aspects of the SLR contribution structure, such as the amount of the employer's contribution, could be changed. The SLR contribution is still subject to the plan's general vesting, non-discrimination, and other legal requirements. A nonprofit interested in providing a similar program should work closely with legal counsel to ensure compliance with various qualified plan requirements.
If you have any questions about the above, or how to make similar changes to your nonprofit's retirement plan, please contact the authors, or any member of either the Employee Benefits and Executive Compensation Group or the Nonprofit Organizations practice at Venable LLP.
Harry Atlas and Lisa Tavares are partners at Venable LLP, and members of the Employee Benefits and Executive Compensation Group. Cynthia Lewin is a partner at Venable, and chair of their Nonprofit Organizations Practice Group. Gregory Matisoff is an associate at Venable’s Employee Benefits and Executive Compensation Group.
This article originally appeared in a slightly different form on Venable’s website.