Retirement Plan Benefits for Reducing Student Loan Debt: Are Mortgages Next?
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VOLUME 45, NUMBER 1 SPRING 2019 JOURNAL of PENSION PLANNING & COMPLIANCE J Editor-in-Chief: Bruce J. McNeil, Esq. PPC Retirement Plan Benefits for Reducing Student Loan Debt: Are Mortgages Next? DANIEL SCHWALLIE Daniel Schwallie, JD, PhD, is an attorney with Aon’s Retirement Legal Consulting & Compliance practice. His areas of consulting include the design and adminis- tration of qualified pension and profit-sharing plans, 403(b) and 401(k) plans, and 457(b) nonqualified deferred compensation plans. He has published numer- ous articles on plan design and compliance and is the primary author of the Cash Balance Plan Answer Book, 3rd ed. (New York: Wolters Kluwer, 2016). recent Internal Revenue Service (IRS) private letter ruling (PLR) opens the door to a plan design that provides retirement benefits for employees who pay down their student loans. The PLR is interesting both for what it says and what it does not say. This article reviews the Aruling and considers some unanswered questions raised by it. 2 / JOURNAL OF PENSION PLANNING & COMPLIANCE INTRODUCTION For many employees, reducing student loan debt may take pre- cedence over saving for retirement. According to a 2016 Aon Hewitt survey, 28 percent of the employees responding to the survey have an outstanding student loan and nearly half are making student loan pay- ments of at least $3,000 per year. Nearly half of Millennial employees (44 percent), 26 percent of Generation X employees, and 13 percent of Baby Boomer employees have student loans.1 The earlier someone starts saving for retirement, the more likely goals for retirement saving will be met. A 2018 study by Aon indicates that an individual starting to save for retirement at age 25 may need to save as much as 16 percent of pay each year until retirement at age 67 (including employer contributions) to achieve adequate retirement savings, while someone starting at age 30 may need to save 20 percent and someone starting at age 35 may need to save 24 percent of pay each year until retirement at age 67 to achieve adequate retirement savings.2 IRS Private Letter Ruling 201833012, dated May 22, 2018, addresses the question of whether an amendment to an existing 401(k) plan that would provide for a nonmatching, nonelective employer contribution to plan participants who pay down student loans (described in more detail below) would violate the so-called “contingent benefit rule” of Internal Revenue Code (Code) section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the related Treasury regulations. The design described in the PLR is novel in that it assists employees with reducing student loan debt while continuing to save for retirement without increasing employer contribu- tions to the plan. WHAT THE PLR SAYS The PLR briefly describes the original plan design as in effect prior to any amendment considering student loan repayments, describes the proposed amendment, and concludes with a favorable ruling on the sin- gle question set forth in the plan sponsor’s request. Prior Plan Design As set forth in the PLR, the plan design in the absence of the proposed amendment permits a plan eligible employee an election to contribute a portion of plan eligible compensation to the plan each payroll period as either pre-tax elective deferrals, Roth contributions, or (non-Roth) after-tax contributions, which are collectively referred to as “elective contributions” in the PLR. If a plan-eligible employee makes an elective contribution during a payroll period equal to at least RETIREMENT PLAN BENEFITS FOR REDUCING STUDENT LOAN DEBT / 3 2 percent of plan eligible compensation during the pay period (the minimum elective contribution permitted under the plan), the plan sponsor makes a matching contribution on behalf of that employee equal to 5 percent of the employee’s plan eligible compensation during the pay period. These matching contributions are made each payroll period. The Proposed Plan Amendment The amendment would create a “student loan benefit program,” under which the plan sponsor would make an employer nonmatching, nonelective contribution on behalf of an employee conditioned on that employee making student loan repayments, as described further below and referenced in the PLR as “SLR nonelective contributions.” The PLR notes that the program is voluntary in that an employee must elect to enroll and, once enrolled, may opt out of enrollment on a prospective basis. An employee who participates in the program would still be eligible to make elective contributions to the plan but would not be eligible to receive matching contributions with respect to those elective contribu- tions while participating in the program. Instead, an employee partici- pating in the program would be eligible to receive the SLR nonelective contributions, as well as true-up matching contributions, as appropriate and described below. If an employee participating in the program makes a student loan repayment during a pay period equal to at least 2 percent of the employee’s plan eligible compensation for that pay period, then the plan sponsor will make an SLR nonelective contribution as soon as prac- ticable after the end of the year3 equal to 5 percent of the employee’s plan eligible compensation for that pay period. The SLR nonelective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If an employee participating in the program does not make a student loan repayment for a pay period equal to at least 2 percent of the employee’s plan eligible compensation, but does make an elective contribution during that pay period equal to at least 2 percent of the employee’s plan eligible compensation for that pay period, then the plan sponsor will make a matching contribution as soon as practicable after the end of the plan year equal to 5 per- cent of the employee’s plan eligible compensation for that pay period. The PLR describes this matching contribution as a “true-up matching contribution.” To receive either the SLR nonelective contribution or the true-up matching contribution under the program, the employee would need to be employed with the plan sponsor on the last day of the plan year, 4 / JOURNAL OF PENSION PLANNING & COMPLIANCE except in the case of termination of employment due to death or disabil- ity. Both SLR nonelective contributions and true-up matching contribu- tions are subject to the same vesting schedule as matching contributions provided on a payroll by payroll period basis to employees not partici- pating in the program. The Ruling The PLR provides the following ruling: In the present case, SLR nonelective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement. Furthermore, because an employee who makes student loan repayments and thereby receives SLR nonelective contributions is still permitted to make elective contributions, the SLR nonelective contribution is not con- ditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.Therefore, with respect to your ruling request, we conclude that your pro- posal to amend the Plan to provide SLR nonelective contri- butions under the program will not violate the “contingent benefit” prohibition of section 401 (k)(4)(A) and section 1.401 (k)-1 (e)(6). Stipulations in the PLR The PLR expressly states that the SLR nonelective contribution will be subject to all applicable plan qualification requirements, includ- ing, but not limited to, eligibility, vesting, and distribution rules, contri- bution limits, and coverage and nondiscrimination testing. The true-up matching contribution will be included as a matching contribution for purposes of any testing under, or requirement of, Code section 401(m), but the SLR nonelective contribution will not be treated as a matching contribution for purposes of any testing under, or requirement of, Code section 401(m). The PLR ruling states that it is based on the plan sponsor’s rep- resentation that no student loans have been extended to any employ- ees who would be eligible for the program and the plan sponsor has no intention to extend any student loans to such employees.4 The PLR also states that, except as specifically set forth above (with respect to the contingent benefit rule), no opinion is expressed or RETIREMENT PLAN BENEFITS FOR REDUCING STUDENT LOAN DEBT / 5 implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in the PLR and the PLR expresses no opinion as to whether the plan satisfies the requirements of Code section 401(a). The PLR indicates that the IRS has not reviewed, and no opinion is expressed or implied concerning the federal tax conse- quences of, the terms of the plan beyond of the scope of the requested ruling. The PLR further states that it is directed only to the taxpayer requesting it and that Code section 6110(k)(3) provides it may not be used or cited as precedent.5 WHAT THE PLR DOES NOT SAY As noted above, the PLR does not say whether the program satis- fies the requirements of Code section 401(a), other than the contingent benefit rule of Code section 401(a)(4)(A). Of course, coverage and non- discrimination testing results will depend in large part on a plan spon- sor’s workforce demographics and employee behavior with respect to the plan. Nevertheless, certain questions remain. Let us consider the potential impact on actual deferral percentage (ADP) and actual con- tribution percentage (ACP) testing; Code section 401(a)(4) amounts testing; benefits, rights, and features testing; and Code section 410(b) testing.