The Internal Revenue Service has released a Private Letter Ruling ("PLR") allowing a plan sponsor to make contributions to employees' 401(k) accounts if the employees are repaying student loans. This is exciting news for employers sponsoring 401(k) plans who hope to attract and retain employees as student loan debt rises to unprecedented levels.

The PLR confirmed that some student loan repayment programs linked to 401(k) employer contributions are acceptable. The approved student loan repayment program allows the employer to make non-elective contributions to an employee's 401(k) account in lieu of the matching contributions the employer would have otherwise made had the employee contributed the amount of the loan payment to his or her 401(k) account. To be eligible for a nonelective employer contribution, employees repaying student loans must pay at least 2% of eligible compensation towards student loan debt. The employer will make a "matching" nonelective contribution of up to 5% of eligible compensation to the employee's 401(k) account.

Should an employee elect to participate in the student loan repayment program but fail to pay at least 2% of eligible compensation towards his or her student loan and instead defer money to his or her 401(k) account, the program provides that the employer will make a "true-up" contribution to the employee's 401(k) account. This true-up contribution is equivalent to the amount the employee would have received as an employer matching contribution.

Several other features of the student loan repayment program described in the PLR are important to note. The program is entirely voluntary, meaning that employees must elect to enroll and may opt out of enrollment on a prospective basis. The employer's nonelective contributions are subject to all eligibility, vesting, and distributions rules as well as contribution limits, although such contributions are not treated as matching contributions for testing under Internal Revenue Code section 401(m). The IRS also specifically stated that this student loan repayment program does not violate the "contingent benefit" prohibitions found in Code section 401(k)(4)(A) because the employer's nonelective contributions are not conditioned on the employee making elective contributions under a cash or deferred payment arrangement.

Although Private Letter Rulings respond to the request of specific taxpayers and may not be relied upon generally, they are good indicators of the IRS's viewpoint and what fact patterns it considers acceptable.

Plan sponsors with questions about student loan repayment programs are encouraged to contact Alison Wright or the Hanson Bridgett Employee Benefits Group.