For a few grand and the patience of Job, you can receive a tailored response to your burning 401(k) plan questions autographed by the Internal Revenue Service. This is the Private Letter Ruling (PLR) program. Plan sponsors may seek a PLR to validate a plan term, procedure or practice that is otherwise firmly planted in a gray area of the law. Risk takers may choose to push forward with an “iffy” practice without regard to tax ramifications. More prudent plan sponsors will at least vet a 401(k) plan design or contribution structure with experienced legal counsel. And those ultra-conservative employers (or those pushing the limits of their own plan) may submit a request to the IRS for approval or denial of a specific plan provision. PLRs are plan-specific and do not set precedent. That means that only the plan sponsor to whom the PLR is addressed may rely on that particular ruling. It also means that PLRs do not create law and cannot be cited by other plan sponsors in support of their own rationale. However, PLRs are published (with employer names redacted) so they can illuminate those of us who from time to time wonder: What the heck is the IRS thinking?
Recently, a PLR made headlines when the IRS determined that a 401(k) plan’s Student Loan Repayment (SLR) feature would not violate the Internal Revenue Code’s contingent benefit rule. Never heard of a Student Loan Repayment benefit inside of a 401(k) plan? I haven’t either. But we have discussed in past posts the notion that a predominant reason for low 401(k) participation rates among millennial employees is due to the sometimes overwhelming obligations to pay off ever-increasing student loans. In effect, millennial employees may feel forced to pay off their student loan debt instead of contributing to 401(k) plans. As of this writing, there is not a tax-advantaged method for an employer pay for employees’ student loan since the typical tuition reimbursement program only provides for current educational expenses. The employer who requested this PLR devised a way to recognize employees’ loan burdens through a creative contribution structure.
Typically, employer contributions are made to an employee’s 401(k) plan contingent upon satisfaction of some kind of condition. For instance, a profit sharing contribution may be contributed to an employee who is employed on the last day of the plan year. More commonly, employer matching contributions are only provided when a participant makes an elective salary deferral to plan of a certain amount or percentage of their paycheck. The employer who requested this PLR proposed amending their 401(k) plan to offer a student loan benefit program where employer nonelective contributions would be conditioned on the employee making student loan repayments. The employee would only get the employer contribution if they proved to the employer that they were concurrently paying off a student loan. Specifically, the employer contribution would be up to 5% of annual compensation for the employee if that employee made student loan repayments in the amount of at least 2% of pay.
The IRS rules that govern a 401(k)’s very existence contain a requirement that prevent plans from conditioning benefits on the employee’s electing to make or not make elective salary deferral contributions. This is referred to as the “contingent benefit rule.” Obviously, traditional matching contributions are codified exceptions to this rule. But the proposed student loan set-up provided that a non-elective profit sharing contribution (and not a matching contribution) would be the benefit. The IRS was asked to determine if this incentive violated the contingent benefit rule, as a result.
What made headlines was the IRS’ response: the proposed SLR non-elective contributions would not violate the contingent benefit rule. The rationale was straightforward, too. The plan wasn’t requiring employees to make any contributions to the plan – it was only asking them to be responsible and make provisions to pay down their student loan debt which is something that sits far outside of the confines of a qualified retirement plan. If the employee paid the requisite student loan amount and chose not to make elective salary deferrals, the 401(k) plan would still make the non-elective employer contribution.
As mentioned, this PLR was successful only for the employer that requested it and has no binding effect for any other employer hoping to structure a plan in a similar vein. With that said, it admittedly does shine a light on the growing student debt problem. It also may encourage employers to explore a creative approach to be more inclusive when it comes to offering benefits that meet employees at their place of need. Plan sponsors should be aware that most prototype or volume submitter 401(k) plans will not have the flexibility to automatically include this type of contribution condition. You should talk with your plan advisor or record keeper to ensure you are aware of the contribution design options available under your plan.
On August 31, 2018, President Trump issued an Executive Order directing the Department of Labor (DOL) and the Department of Treasury to consider issuing regulations and guidance regarding some ideas designed to improve employee benefits under qualified retirement plans. Executive Orders typically fall somewhere between being viewed as a PR stunt and a signal of substantive change. In this case, because retirement benefits expansion is an area that has garnered support from both political parties, these proclamations stand a good chance being effectuated into law. The President’s three major initiatives are to:
It will be interesting to see how the agencies respond to this Order and how it will affect retirement legislation currently sitting in committee in the House and Senate. Stay tuned!
For more information about retirement planning or other employee benefits issues, please contact us.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including taxation and healthcare reform.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
In our 2015 MarketPulse trend study, we introduce our first annual WellnessPulse benchmarking study, in which we survey our clients about their wellness programs and share key results. We also cover trends in executive compensation and benefits, health plan design, healthcare reform, social engineering and cyber risks, workers' compensation, and retirement benefits.
Download the PDF: MarketPulse 2015
Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
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