As retirement plan practitioners, every day we tell young people it is increasingly important to start saving toward retirement. Each year we are seeing increases in the number of high school graduates that are choosing to attend college and each year we are seeing increases in tuition costs.
College loans currently account for 1.4 trillion dollars of personal debt seen across America. This raises the question – is it possible to pay off student loans and actively save for retirement? Abbott Laboratories decided to ask the IRS.
Abbott Industries proposed amending their 401(k) plan to allow for the employer to fund 401(k) contributions to employees based on their loan payments as a percentage of pay, taking the place of matching contributions. They argued that other companies are doing this already without IRS guidance. This request prompted the IRS to issue Private Letter Ruling (PLR) 201833012 which provided the employer approval and guidance on this type of offering.
Key takeaways of the PLR:
- The 401(k) plan must allow for participants to make elective contributions.
- The program is amended into the plan as a voluntary option for participants, to which they can opt-in or out.
- The employee must meet the eligibility requirements to participate in the plan.
- The eligible employee must make a contribution greater than or equal to the minimum elective deferral permitted under the plan (i.e. 1% of pay).
- The employer contribution is considered non-elective and is conditional upon the participant making their student loan repayments.
- The participant is still eligible to make elective contributions while participating in the program. If a participant enrolls into the program and later opts-out, they become eligible for regular matching contributions.
- The contributions are subject to the vesting schedule set by the plan.
It is important to note that Private Letter Rulings are directed only to the taxpayer requesting the action. Therefore, only Abbott Industries may rely on this PLR. While the PLR does indicate the direction the IRS will lean on this type of offering, setting up a plan with this benefit now may be risky.
This type of benefit is not for everyone. Student loan repayments and their corresponding employer contributions will not be considered in ADP or ACP discrimination testing or allowed as safe harbor contributions. As more people are talking about this option, the IRS may address this matter in future guidance.