Student Loan Program - Match Exclusion Method

[Gruegen]

It seems that with the recent Abbott Labs Private Letter Ruling (201833012), as well as announcements from large recordkeepers (Empower and Fidelity), there is a lot of noise about integrating a student loan repayment program with a retirement plan. Now, we can argue whether it makes sense to do such integration, but nevertheless, HR managers are seeing the headlines and are asking questions. 

Suppose a company provides student loan repayment program under which the company will reimburse (ie - make a payment directly to the employee's creditor) dollar for dollar of the employee's student loan repayments of up to $1,200 each year. The employer would develop procedures to substantiate the student loan repayments made by the employee. Further, I assume that the $1,200 reimbursement would be taxable to the employee. 

Further also suppose that this company offers a 401(k) retirement plan that provides a 50% up to 6% non-safe harbor matching contribution. So for an employee with compensation of $40,000 and a 6% deferral rate, the employee would receive a $1,200 matching contribution. 

The company wants to manage employee benefit costs, so the employer would not want an employee to receive both the $1, 200 student loan repayment AND a $1,200 matching contribution under the retirement plan. Could the plan document be written to exclude "Employees Participating in a Student Loan Repayment Program" from being eligible to receive non-safe harbor matching contributions? Assuming that the plan's matching coverage is greater than 70%, are there any other problems with this approach?

[justanotheradmin]

What you are suggesting, a class exclusion from the match, is materially different than the PLR. In that instance the plan wanted to GIVE a match to people who did not defer, but were making student loan payments. 

I'm not aware of anything that would make the fact that the exclusion is tied to a non-retirement plan benefit impermissable, assuming, as you point out, that testing passes. 

[Luke Bailey]

So Gruegen, you're saying that the plan in question is either not a safe harbor, or that the exclusion from matching for matching in excess of the safe harbor match? Seems like it would probably be OK, although to my mind too complicated.

[justanotheradmin]

One thought, I would suggest asking an attorney if creates a CODA- type arrangement. 

An employee in theory is choosing between $1,200 going towards their student loans (which is taxable income to them), OR being eligible for a plan match (that may or may not be equal to the $1,200). 

It has been a long time since I reviewed those rules, but one factor was definitely the employees ability to choose how to receive the money. 

I don't know if the fact that actual cash is off the table changes the analysis. Maybe someone else (Luke?) can chime in. 

[Luke Bailey]

On ‎5‎/‎9‎/‎2019 at 4:54 PM, justanotheradmin said:

One thought, I would suggest asking an attorney if creates a CODA- type arrangement. 

An employee in theory is choosing between $1,200 going towards their student loans (which is taxable income to them), OR being eligible for a plan match (that may or may not be equal to the $1,200). 

It has been a long time since I reviewed those rules, but one factor was definitely the employees ability to choose how to receive the money. 

I don't know if the fact that actual cash is off the table changes the analysis. Maybe someone else (Luke?) can chime in. 

justanotheradmin, you raise a really good point. I think it probably depends on what Gruegen means when says that the employer would write the plan "in such a way as to "exclude 'Employees Participating in a Student Loan Repayment Program." If you assume that all of the employees who qualify for the student loan assistance get that and are then excluded from the match, or choose to take it without knowledge that the result will be that they will be excluded from the match, then it would seem not to be a CODA. But if on the other hand you assume that the way this is done is to essentially give each employee with student loan debt a choice between either (a) $1,200 in student loan assistance, if they can show they have student loan debt, or (b) matching contributions in the 401(k) plan, then it would appear to be a cash or deferred election under Section 1.401(k)-1(a)(3)(I). Of course, for new employees you could construct this to conform to the one-time irrevocable election rules.

Good catch.