Student loan repayment

[Belgarath]

With regard to the whole issue due to PLR 201833012, and a 401(k) plan with a new comparability formula with everyone in their own group:

During discussion, an idea was floated about not formally amending a plan, but (if limited to ONLY NHCE's) if an employer could simply make a contribution to the accounts of anyone who made student loan repayments.

This is an interesting question. It doesn't pass the "smell" test, but based upon the PLR's analysis of the contingent benefit rule, what rule(s) might this violate? Certainly won't hurt coverage/nondiscrimination testing, if limited to NHCE's. No requirement for a participant to defer to receive this benefit.

It's hard to imagine that the IRS would allow this willy-nilly for all situations. Car loans. Mortgages. Whatever. Since it is a PLR, they could simply say "no dice." I'm just curious about general thoughts. (I wouldn't even have raised this question in the old days of definitely determinable benefits, but with documents that allow for employer discretion to each participant, subject to coverage/nondiscrimination testing, it raises some interesting discussion.) 

Thanks.

[Bird]

54 minutes ago, Belgarath said:

During discussion, an idea was floated about not formally amending a plan, but (if limited to ONLY NHCE's) if an employer could simply make a contribution to the accounts of anyone who made student loan repayments.

Isn't that exactly what was proposed in the PLR request?

[Peter Gulia]

An employer that provides a nonelective contribution for a participant who’s repaying a student loan might do so as a recognition that the worker can’t afford to make the elective deferral that would earn the retirement plan’s matching contribution.  This has the desired employee-relations effect only if the employer communicates the provision.

 

If the idea of an allocation group of one for every participant really works, imagine a summary plan description and other participant communications with something like this:

 

Beyond participant contributions and matching contributions, your retirement plan allows us to decide nonmatching contributions (if any) in our business discretion.  About each participant (including one who makes no participant contribution), we may decide whether to make a nonmatching contribution, and its amount (if any).  We decide this as our business choice.  We might consider, among many factors, information we have about whether your financial obligations—including those for a student loan, mortgage, or birth-or-adoption expenses—and payments you made on all or some of those obligations made it unreasonable for you to make participant contributions.  We might decide a nonmatching contribution somewhat similar in amount to the matching contribution you could have gotten had you made participant contributions.  We need not make these business choices uniformly.

 

What do BenefitsLink mavens think about whether this is practical?

 

Does it vary with the size of the employee population?

 

Is it feasible to implement this using an IRS-preapproved document?

[Belgarath]

Hi Bird - the PLR provided that the plan would be AMENDED to offer this program. I'm talking about utilizing the flexibility of each participant being in a separate group to do this WITHOUT amending the plan. The idea being that you wouldn't necessarily have to take a plan out of pre-approved status by amending it to implement such a program. A "side door" approach in a manner of speaking.

Not saying I like the idea, and not saying I think it is valid - just a discussion. 

P.S. - just random thoughts bouncing around - if in a given pay period someone participating in the program has a 2% or more student loan repayment, they are not eligible for the matching contribution. Instead they get the 5% nonelective.  Is this a BRF issue with regard to not being eligible for the match? 

[Peter Gulia]

And that's what I ask: could an employer do this within an IRS-preapproved document's tolerance for a discretionary nonelective contribution?

[Bird]

3 hours ago, Belgarath said:

Hi Bird - the PLR provided that the plan would be AMENDED to offer this program. I'm talking about utilizing the flexibility of each participant being in a separate group to do this WITHOUT amending the plan. The idea being that you wouldn't necessarily have to take a plan out of pre-approved status by amending it to implement such a program. A "side door" approach in a manner of speaking.

OK, just wanted to make sure I wasn't missing anything.  I don't see any difference between amending and using something that exists to the same purpose.  Not that I would do it...I mean, seriously, what is wrong with people that they come up with convoluted ideas like this?!  (I don't mean you; just the original concept - and the idea that someone would spend money submitted it for a PLR, good grief.)

[Peter Gulia]

One of the great challenges of employee benefits is that it’s a variation from money wages.

 

Imagine two employees with equal skills, work, and salaries.  One has no spouse and no child.  The other has a spouse and children, and covers them in the employer’s health plan.  The employee’s salary reduction for the health coverage doesn’t meet the employer’s expense.  The result is different all-in compensation.  Is this fair between employees with equal skills and work?

 

Imagine another two employees with equal skills, work, and salaries.  One has no debt.  The other has student-loan obligations.  The debt-free employee makes elective deferrals and gets the employer’s matching contribution.  The other employee, after meeting modest living expenses and the required payments on her student loans, can’t afford an elective deferral and so gets no matching contribution.  The result is different all-in compensation.  Is this fair between employees with equal skills and work?

 

We could describe many more situations that some might perceive as involving an inequality or other unfairness.  Intelligent people could have a wide range of views about what’s fair or unfair.  Some might say life’s not fair.  Also, people can have a wide range of views about what serves an employer’s interests.

 

I don’t express a view, but I understand why some employers choose to provide something to meet a perceived fairness issue, or even because it attracts some desired workers.  https://www.abbott.com/corpnewsroom/leadership/tackling-student-debt-for-our-employees.html

 

Not every employer will have the circumstances that led Abbott Laboratories to provide a nonelective contribution related to student-loan repayment.

 

But if a client asks me to implement this, I’d like to have thought about whether one could do it within an IRS-preapproved document.

[Luke Bailey]

On ‎9‎/‎17‎/‎2020 at 12:47 PM, Belgarath said:

This is an interesting question. It doesn't pass the "smell" test, but based upon the PLR's analysis of the contingent benefit rule, what rule(s) might this violate? Certainly won't hurt coverage/nondiscrimination testing, if limited to NHCE's. No requirement for a participant to defer to receive this benefit.

If your plan document provides for discretionary contributions allocated in a discretionary manner based on criteria broad enough to include (e.g., "any basis acceptable to the employer,"), sure this is OK.

[Pam]

Even with a discretionary contribution, you must have a definite allocation formula. That is why the plan would have to be amended to adopt such a program.

[Mike Preston]

52 minutes ago, Pam said:

Even with a discretionary contribution, you must have a definite allocation formula. That is why the plan would have to be amended to adopt such a program.

Not true.How about everybody in their own group.

[Bird]

On 9/19/2020 at 12:05 AM, Mike Preston said:

Not true.How about everybody in their own group.

Which is exactly where we started.  Quite a meandering discussion.

[QP_Guy]

if you exclude HCEs, i see no reason why this wouldn't just be fine

 

[Mike Preston]

I think the underlying methodology is subject to scrutiny.   If it is really a matching formula, then you have a contingent rule violation, because it isn't legally a match.

[Luke Bailey]

44 minutes ago, Mike Preston said:

I think the underlying methodology is subject to scrutiny.   If it is really a matching formula, then you have a contingent rule violation, because it isn't legally a match.

The analysis in the ruling is that the employer is making the nonelective contributions based on the student loan repayments, not elective deferrals. The employees in the ruling did not have to defer to get the nonelective contributions, and in fact couldn't get both student loan repayment nonelectives and regular matching. You're doing something different than rewarding folks for deferring. It is similar to a professional firm cross-tested plan in terms of structure. You need to have a bare minimum of language (e.g., individual level discretion and each employee in own group), but you're exercising your employer/plan sponsor discretion to show love to (typically) younger folks repaying their overpriced higher education debts instead of, or in addition, to your older/higher income folk. With any luck, my son will get a job there.

[AKconsult]

The whole purpose of the PLR discussed here is that the employer was asking for an opinion that in providing a nonelective contribution based on the employee having made a student loan payment, that there was not a violation of the contingent benefit rule.  The IRS agreed that providing a contribution based on the student loan payment was NOT a match, so there is no concern about a violation of the contingent benefit rule.  We use the ASC document and the attorneys there have said that if the document contains new comparability formula where each person is in his/her own group, and in fact the employer is providing a nonelective contribution based on student loan payments, that fits within the document, no amendment needed.