Volume 45, Number 1 Spring 2019 JOURNAL of PLANNING & COMPLIANCE J Editor-in-Chief: Bruce J. McNeil, Esq. PPC Plan Benefits for Reducing Student : 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 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 . 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 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.

ADP and ACP Testing Elective contributions (including Roth contributions but not non- Roth after-tax contributions) to a 401(k) plan must pass the ADP test, unless the plan is an ADP safe harbor design.6 Employer matching con- tributions to a 401(k) or 403(b) plan must pass the ACP test, unless the plan is an ACP safe harbor design.7 Non-Roth after-tax contributions must pass the ACP test regardless of whether the plan is an ACP safe harbor design or not.

ADP and ACP test results may be affected adversely by the program Assuming non-highly compensated employees are more likely to opt into the program, because non-highly compensated employees are more likely to find it difficult to both repay student loans and make elective contributions to the plan, both ADP and ACP test results may be affected adversely by the program. The greater the number of non- highly compensated employees who opt into the program and don’t make elective contributions, the worse ADP test results will become, all else equal. Because participants who opt into the program do not receive a matching contribution during any payroll period in which they 6 / JOURNAL OF PENSION PLANNING & COMPLIANCE make student loan repayments sufficient to receive the SLR nonelective contribution, ACP test results will worsen the greater the number of non-highly compensated employees who opt into the program, even if they make elective contributions, all else equal. The discussion of this paragraph assumes that most employees who opt to participate in the program are making pre-tax elective deferrals or Roth contributions rather than non-Roth after-tax contributions.

Matching contribution ADP/ACP safe harbor design not possible An important facet for the student loan benefit program not to violate the contingent benefit rule is that the SLR nonelective contri- bution is made without regard to whether the employee participating in the program makes any elective contribution throughout the year. Thus, a participant in the program may make elective deferrals even when receiving the SLR nonelective contribution. A 401(k) plan with the program design described in the PLR cannot be an ADP safe har- bor design that uses matching contributions as the ADP safe harbor contributions, because in any payroll period during which a participant made student loan repayments sufficient to receive the SLR nonelective contribution, the participant would not be eligible for such ADP safe harbor matching contributions. Therefore, not every non-highly com- pensated employee who makes elective deferrals would receive the safe harbor matching contribution as required for the plan to be an ADP safe harbor design.8 For the same reasons, a 401(k) or 403(b) plan with the program design described in the PLR cannot be an ACP safe har- bor design that uses matching contributions as the ACP safe harbor contributions.9

Amounts Testing of SLR Nonelective Contributions The SLR nonelective contributions are not matching contributions under Code section 401(m).10 Rather than being ACP tested, the SLR nonelective contributions, in combination with any other employer non- elective contributions under a defined contribution plan, must be non- discriminatory in amount, either based on specified safe harbor uniform allocation formulas or by passing a numerical general nondiscrimina- tion test.11 Because the SLR nonelective contributions are allocated only to those participants who opt into the program and make sufficient stu- dent loan repayments in a payroll period to receive the SLR nonelective contributions for that payroll period, the allocation of the SLR non- elective contributions does not satisfy any of the permitted safe harbor uniform allocation formulas and must pass the general test for nondis- crimination in amount of contributions.12 Although the SLR nonelec- tive contributions are a uniform 5 percent for each payroll period that an Retirement Plan Benefits for Reducing Student Loan Debt / 7 employee participating in the program makes student loan repayments sufficient to receive the SLR nonelective contribution, because there are no SLR nonelective contributions on behalf of employee for other pay- roll periods in the same plan year, the SLR nonelective contributions do not satisfy a permitted safe harbor uniform allocation formula for the plan year.13 If there are other employer nonelective contributions, the SLR nonelective contributions must pass the general test in combination with those other nonelective contributions or, if the other nonelective contri- butions satisfy a permitted safe harbor uniform allocation formula, the plan can be “restructured’ into component plans, one component plan being the SLR nonelective contributions (and any other nonelective contributions that do not satisfy a permitted safe harbor uniform allo- cation formula) and another component plan for each other nonelective contribution that satisfies a permitted safe harbor uniform allocation formula.14 Assuming that the group receiving the SLR nonelective con- tributions consists mostly of non-highly compensated employees, the SLR nonelective contributions are likely, but not guaranteed, to pass the general test.

Benefits, Rights, and Features Testing Nondiscrimination testing includes testing whether benefits, rights and features of a plan discriminate in favor of highly compen- sated employees (HCEs).15 The facts of the PLR suggest there may be at least two benefits, rights, and features that vary among par- ticipants in the 401(k) plan. Participants who opt into the program receive matching contributions as soon as practicable after the end of the plan year rather than on a payroll period basis as for participants who do not opt into the program, which may require benefits, rights and features (BRF) testing. Participants who opt into the program but do not make student loan payments each payroll period sufficient to receive the SLR nonelective contribution for that period, but who do make elective contributions sufficient to receive matching contri- butions in some of those payroll periods, may have different rate of matching contributions for the plan year than participants who do not opt into the program and make elective contributions sufficient to receive matching contributions, which would arguably require BRF testing.

BRF testing of matching contributions received at year-end rather than each payroll period BRF testing is generally required if a right or feature is not available on substantially the same terms as another right or feature 8 / JOURNAL OF PENSION PLANNING & COMPLIANCE applicable to employees under a plan unless it cannot reasonably be expected to be of meaningful value to an employee.16 Arguably, receiv- ing an employer contribution sooner rather than later is of meaning- ful value to an employee, in which case this different right or feature applicable to participants who opt into the program would be subject to BRF testing. Assuming that non-highly compensated employees are more likely to be subject to the delayed matching contribution and that BRF testing applies, the BRF test might not pass unless it can be combined in a BRF test with the right or feature of receiving match- ing contributions on a payroll period basis for participants who do not opt into the program using the BRF permissive aggregation rules and the combined BRF test is satisfied.17 The permissive aggregation rules would require that the right or feature of receiving matching contribu- tions on a payroll period basis for participants who do not opt into the program, as the BRF of inherently equal or greater value, satisfy BRF testing on its own. There may be some question as to who is in the group of employees to whom the BRF is currently available during the plan year.18 Is it the group of employees who opt into the plan or the group of employees with student loan debt who could opt into the plan or is it some other group?

BRF testing of matching contribution rates The right to each rate of allocation of matching contributions is an “other right or feature” subject to BRF testing.19 According to the facts set forth in the PLR, plan participants must elect a minimum of 2 percent of plan compensation as an elective contribution in a payroll period in order to make elective deferrals for that payroll period and those who do (or choose elective contributions of a greater percentage) receive a matching contribution of 5 percent of plan compensation for that period, unless they have opted into the program. Does this mean that those opting into the program could have a different rate of alloca- tion of matching contributions than those who do not opt into the pro- gram, depending upon whether they made elective contributions during a payroll period during which they received a SLR nonelective contribu- tion rather than matching contribution? Or does one look only to those payroll periods in which a participant who has opted into the program makes elective contributions of at least 2 percent of plan compensation and does not make student loan repayments of at least 2 percent of plan compensation to find that all plan participants have the same matching contribution rates? For example, a participant who made elective contributions equal to 2 percent of plan compensation every payroll period of a plan year, but opted into the program after one-fourth of the payroll periods that Retirement Plan Benefits for Reducing Student Loan Debt / 9 year and made student loan repayments equal to 2 percent of plan com- pensation every payroll period for the last three-fourths of the plan year, would receive the 5-percent matching contribution for only one fourth of all elective contributions for the plan year. Does that mean this par- ticipant had a rate of allocation of matching contributions equal to 1.25 percent (one-fourth of 5 percent)? Or, because the participant opted into the program and is not eligible for a matching contribution for any pay- roll period in which the participant makes student loan repayments of at least 2 percent of plan compensation, are those payroll periods in which the participant makes student loan repayments of at least 2 percent of plan compensation ignored when determining the matching contribu- tion rate applicable to the participant? If payroll periods in which the participant makes student loan repayments of at least 2 percent of plan compensation are taken into account for purposes of determining the matching contribution rate applicable to the participant, this suggests that BRF testing of match rates may be needed. Assuming non-highly compensated employees are more likely to opt into the program and have lower match rates, the BRF test might not pass unless it can be combined in a BRF test with the 5-per- cent rate for participants who do not opt into the program using the BRF permissive aggregation rules, and the combined BRF test is satisfied. The permissive aggregation rules would require that the 5-percent match rate for participants who do not opt into the program, as the BRF of inher- ently equal or greater value, satisfy BRF testing on its own.

Coverage Testing The Code section 401(m) matching contributions and Code section 401(a) nonelective contributions must be coverage tested separately.20 The Code section 410(b) test is satisfied if either the ratio percentage test is passed or the average benefit test is passed.21 The ratio percentage test requires that either (1) at least 70 percent of an employer’s non-highly compensated employees benefit or (2) a percentage of the employer’s non-highly compensated employees benefit that is at least 70 percent of the employer’s HCEs who benefit.22 An employee is treated as benefit- ing with respect to nonelective contributions for purposes of coverage testing for a plan year if and only if the employee receives an allocation for that plan year.23 An employee, however, is treated as benefiting with respect to matching contributions for purposes of coverage testing for a plan year if and only if the employee is an employee who is directly or indirectly eligible to receive an allocation of matching contributions under the plan for all or a portion of the plan year.24 Under the facts of the PLR, it would seem that all plan participants are eligible for matching contributions, because even those employees opting into the 10 / JOURNAL OF PENSION PLANNING & COMPLIANCE program can receive matching contributions on elective contributions made during a payroll period when not receiving an SLR nonelective contribution. If the ratio percentage test cannot be passed, then the average benefit test, which consists of both the nondiscriminatory classifica- tion test and the average benefit percentage test, might be able to pass.25 The nondiscriminatory classification test is satisfied if and only if, for the plan year, employees who qualify under a reasonable classifica- tion established by the employer benefit. A reasonable classification is established by the employer if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit.26 According to Treasury regulations, “Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria.”27 One question not addressed in the PLR is whether employees who reduce student loan debt constitute a reasonable classification for purposes of the average benefit test, if the average benefit test, rather than the ratio percentage test, is needed to pass. The second part to the nondiscriminatory classification test is similar to the ratio percent- age test, although percentages less than 70 percent may be acceptable to move on to the average benefit percentage test portion of the average benefit test.28 The average benefit percentage test is satisfied for a plan year if the average benefit percentage for employees who are non-highly compensated employees is at least 70 percent of the average benefit per- centage for HCEs.29 Determining the average benefit percentages is data intensive and subject to a number of rather complex rules, depending on the specific employer circumstances. Based on the facts in the PLR, if there are no other nonelective contributions provided under the plan, then only those employees who opt into the program and make sufficient student loan repayments to receive SLR nonelective contributions for at least one payroll period would be considered benefiting with respect to nonelective contribu- tions. Given the likelihood that most such employees will be non-highly compensated employees, it seems likely that the program would pass the ratio percentage test with respect to the SLR nonelective contributions. If there are other employer nonelective contributions, say available to all employees such that coverage is passed, then the SLR nonelective contri- butions would simply be in addition to those, so the nondiscrimination in amount testing described above may be more important, depending on the formula for the other nonelective contributions. On the other hand, under the facts presented in the PLR, apparently all employees eligible to make elective contributions under the plan would be treated Retirement Plan Benefits for Reducing Student Loan Debt / 11 as benefiting with respect to elective contributions and matching con- tributions, even those who opt into the program, so it would seem the program would likely pass the ratio percentage test as well. As noted above, the coverage and nondiscrimination testing results are dependent upon on a plan sponsor’s workforce demographics and employee behav- ior with respect to the plan, as well as other plans an employer may have.

Alternative Designs Unsurprisingly, the PLR does not consider alternative program designs. The pre-program design described in the PLR is less common than many 401(k) matching contribution designs, as it required elective contributions of at least 2 percent of plan compensation to receive a matching contribution of 5 percent of plan compensation. It is more common for a 401(k) matching contribution design to provide a match on each percent of elective deferrals up to some maximum percentage of plan compensation. For example, consider a plan that provides a dollar for dollar (100 percent) matching contribution on each 1 percent of plan com- pensation elective contribution up to 6 percent of plan compensation. Suppose, in this example, that the proposed student loan benefit pro- gram design provides a 1 percent (of plan compensation) nonelective contribution for each payroll period in which an employee pays down student loan debt by 1 percent of plan compensation. Like the PLR program, this nonelective contribution would be provided as soon as practicable after the end of the plan year and participants in the program would be able to make elective contributions regardless of whether they pay down student loans sufficient to receive a nonelective contribution. Unlike the PLR design, this hypothetical program would provide the 100 percent matching contribution on each 1 percent of plan compensation made as elective contributions up to 6 percent of plan compensation reduced by the percentage of plan compensation contributed on behalf of the employee as a nonelective contribution. If an employee pays down student loans by 1 percent of plan com- pensation in a payroll period and is to receive 1 percent of plan com- pensation as a nonelective contribution, that employee would still be eligible to receive matching contributions on each 1 percent of plan compensation contributed as elective contributions up to 5 percent of plan compensation. Similarly, if an employee pays down student loans by 2 percent of plan compensation in a payroll period and is to receive 2 percent of plan compensation as a nonelective contribution, that employee would still be eligible to receive matching contributions on each 1 percent of plan compensation contributed as elective con- tributions up to 4 percent of plan compensation, and so on. In other 12 / JOURNAL OF PENSION PLANNING & COMPLIANCE words, the nonelective contributions phase out the matching contribu- tions, but the nonelective contributions are independent of whether the employee makes elective contributions. Further, only matching contributions are contingent on whether an employee makes elective contributions. The PLR program is arguably just an extreme example of the pro- gram described in the prior paragraph. In the PLR program, the match- ing contributions are completely phased out for any payroll period in which an employee receives the SLR nonelective contribution, i.e., a 5-percent SLR nonelective contribution results in a zero percent match- ing contribution. In the case of either the PLR program or the program described in the prior paragraph, an important point in not violating the contingent benefit rule is that the nonelective contribution is inde- pendent of elective contributions and only depends upon student loan debt repayments. If either the PLR program or the program of the prior paragraph were structured such that the matching contributions phased out the nonelective contributions, then the design might arguably violate the contingent benefit rule, because the nonelective contribution would be contingent upon the matching contributions which are contingent upon the elective contributions. That would appear to make the non- elective contributions (indirectly) contingent upon whether an employee makes or does not make elective contributions, which would then violate the contingent benefit rule. For instance, if the PLR design had said that an employee who makes elective contributions of at least 2 percent of plan compensation would receive a matching contribution of 5 percent of plan compensation, but would not be eligible to receive a SLR non- elective contribution of 5 percent of plan compensation, even though the employee made student loan repayments of at least 2 percent, one would expect that the IRS would have ruled that the contingent benefit rule was violated. The example of the prior paragraph is seemingly no different and, if structured properly, would seem to be eligible for a simi- lar favorable private letter ruling from the IRS regarding the contingent benefit rule. By now, the reader may be wondering what “mortgages” in the title of this article had to do with anything. The program described in the PLR is novel, and perhaps even noble, in that it assists employees in reducing student loan debt while continuing to save for retirement. Perhaps other employers will choose a different goal to help with while allowing employees to save for retirement, such as paying down a mort- gage, reducing healthcare debt, or contributing to charities. The PLR does not address whether there are any restrictions on what employee activities can be linked to providing an employer nonelective contribu- tion to a qualified plan on behalf of the employee. Retirement Plan Benefits for Reducing Student Loan Debt / 13

CONCLUSION

An employer considering a plan design like that of the PLR should review several practical considerations. An employer with an ADP/ACP safe harbor design that uses matching contributions to sat- isfy the safe harbor contribution requirement needs to consider whether such a student loan benefit program is worth eliminating or otherwise changing the safe harbor plan design. An employer without an ADP/ ACP safe harbor design should consider how much margin is available in the ADP and ACP testing to absorb the likely worsening of those tests as well as the possible refunds of elective contributions and for- feitures of matching contributions that might result. Consideration should be given to what benefits, rights and features testing might be required. An employer with a complex controlled group and multiple plans should consider the broader impact on nondiscrimination testing and otherwise. There are various administrative questions to answer. Can payroll, human resources, and recordkeeper handle such a program? If using an IRS preapproved plan document, does the preapproved document provide for such a program? If not, will it in the future or does such a program requires an individually designed plan document written by someone other than the recordkeeper? Of course, an employer should carefully consider the possible value of such a program to its workforce before proceeding. Also, the employer should consider whether to obtain its own private letter ruling, particularly if there will be any deviations from the design in the PLR or if there are any concerns that the PLR did not address issues of impor- tance to the employer. There are potentially other considerations besides those listed here, so an employer should enlist the aid of qualified advisors, which may include actuaries, attorneys, consultants, and recordkeepers, among others.

NOTES

1. See Hewitt’s 2016 Financial Mindset® Study, p. 42, which surveyed over 2,000 U.S. workers. On page 1, the study defines those born during 1979 through 1996 as Millennials, those born dur- ing 1965 through 1978 as Generation Xers, and those born during 1946 through 1964 as Baby Boomers. 2. See Aon’s The Real Deal: 2018 Retirement Income Adequacy Study, p. 21. 3. Presumably, the PLR means “plan year” when stating “year.” 4. It is the author’s understanding that this stipulation was intended, at least in part, to avoid con- cern about creating a prohibited transaction under Code section 4975. 14 / JOURNAL OF PENSION PLANNING & COMPLIANCE

5. The PLR also includes the usual disclaimer and caveats that the private letter ruling is based upon information and representations submitted by the taxpayer and accompanied by a pen- alties of perjury statement executed by an appropriate party, as specified in Rev. Proc. 2018-1, section 7.01 (16)(b), and that the IRS has not verified any of the material submitted in support of the request for ruling, and such material is subject to verification on examination. Further, that the IRS will revoke or modify a letter ruling and apply the revocation retroactively if: there has been a misstatement or omission of controlling facts; the facts at the time of the transaction are materially different from the controlling facts on which the ruling was based; or, in the case of a transaction involving a continuing action or series of actions, the control- ling facts change during the course of the transaction, as specified in Rev. Proc. 2018-1, sec- tion 11.05. 6. See Treasury regulations section 1.401(k)-1(b)(1). A grandfathered governmental 401(k) plan maintained by a state or local government is not subject to the ADP test. See Treasury regula- tions section 1.401(k)-1(b)(2). Roth contributions are generally treated as elective deferrals for purposes of the Code, except that Roth contributions are not excludible from a participant’s gross income. See Code section 402A(a)(1) and Treasury regulation section 1.401(k)-1(f)(4)(i). 7. See Treasury regulations section 1.401(m)-1(b)(1). A plan maintained by a state or local govern- ment is not subject to the ACP test. Also, a collectively bargained plan, or the portion of a plan, that automatically satisfies Code section 410(b) is treated as satisfying the ACP test. See Treasury regulations section 1.401(m)-1(b)(2). 8. See Treasury regulation section 1.401(k)(4)-3(c)(4), which states that the safe harbor matching contribution requirement is not satisfied if the ratio of matching contributions made for a highly compensated employee to that highly compensated employee’s elective contributions for a plan year is greater than the ratio of matching contributions to elective contributions that would apply with respect to any non-highly compensated employee eligible under the plan at the same percentage of safe harbor compensation. 9. See Treasury regulation section 1.401(m)(4)-3(c), which states that that the safe harbor matching contribution requirement is satisfied if the plan satisfies the safe harbor matching contribution requirement of Treasury regulation section 1.401(k)(4)-3(c) that the design of the PLR design would not satisfy. Further, Treasury regulation section 1.401(m)(4)-3(d)(4) states that the ACP safe harbor requirements are satisfied only if the ratio of matching contributions made for a highly compensated employee to that highly compensated employee’s elective contributions (or after-tax contributions or sum of after-tax and elective contributions, if the plan provides for a match on after-tax or both types of contributions) for a plan year is no greater than the ratio of matching contributions to elective contributions (or after-tax contributions or sum of after-tax and elective contributions, if the plan provides for a match on after-tax or both types of contributions) that would apply with respect to any non-highly compensated employee eligible under the plan at the same percentage of safe harbor compensation. The ACP safe harbor requirement of the prior sentence applies regardless of whether the ADP safe harbor is based on safe harbor matching contributions or safe harbor nonelective contributions. This appears to leave open the door for a similar student loan benefit program with an ADP safe harbor design, but without an ACP safe harbor design, by using 3 percent nonelective contri- butions as the safe harbor contributions rather than matching contributions along with SLR Retirement Plan Benefits for Reducing Student Loan Debt / 15

nonelective contributions. There is no requirement to compare highly compensated employee matching contributions to elective contributions ratio to non-highly compensated employee matching contributions to elective contributions ratio under the nonelective contribution ADP safe harbor of Treasury regulation section 1.401(k)(4)-3(b)(1). However, it is not clear how will- ing employers would be to provide a 3-percent safe harbor nonelective contribution in addition to a combination of matching and SLR contributions. 10. A “matching contribution” is any employer contribution made to a defined contribution plan on behalf of an employee because of an employee’s (non-Roth) after-tax contribution or the employee’s elective deferral (including a Roth contribution). See Code section 401(m)(4)(A) and Treasury regulation section 1.401(m)-1(a)(2). 11. See Treasury regulation sections 1.401(a)(4)-1(b)(2)(ii) and 1.401(a)(4)-2(a). 12. See Treasury regulation section 1.401(a)(4)-2(c). 13. See Treasury regulation section 1.401(a)(4)-2(b)(1). 14. See Treasury regulation section 1.401(a)(4)-9(c). 15. See Treasury regulation sections 1.401(a)(4)-1(b)(3) and 1.401(a)(4)-4. 16. See Treasury regulation section 1.401(a)(4)-4(e)(3)(i) & (ii). 17. See Treasury regulation section 1.401(a)(4)-4(d)(4). 18. See Treasury regulation section 1.401(a)(4)-4(b)(1). 19. See Treasury regulation section 1.401(a)(4)-4(e)(3)(iii)(G). This discussion ignores the com- plicating factor that matching contributions may also apply to non-Roth, after-tax employee contributions. 20. See Treasury regulation section 1.410(b)-7(c)(1). 21. See Treasury regulation sections 1.410(b)-2(b)(2) and 1.410(b)-2(b)(3). Note that Treasury regu- lation section 1.410(b)-2(b) lists other situations which result in satisfying coverage testing, such as a plan that benefits solely collectively bargained employees, but the author is assuming either the ratio percentage test or average benefit test will apply in most situations. 22. See Code section 410(b)(1) and Treasury regulation section 1.410(b)-2(b)(2). 23. See Treasury regulation section 1.410(b)-3(a)(1). 24. See Treasury regulation sections 1.410(b)-3(a)(2) and 1.401(m)-5 definition of “eligible employee.” 25. See Code section 410(b)(2) and Treasury regulation section 1.410(b)-2(b)(2). 26. See Treasury regulation sections 1.410(b)-4(a) & (b). 27. See Treasury regulation section 1.410(b)-4(b). The regulation goes on to say, “An enumeration of employees by name or other specific criteria having substantially the same effect as an enu- meration by name is not considered a reasonable classification.” 28. See Treasury regulation section 1.410(b)-4(c). 29. See Code section 410(b)(2) and Treasury regulation section 1.410(b)-5.

Copyright © 2019 CCH Incorporated. All Rights Reserved. Reprinted from Journal of Pension Planning & Compliance, Spring 2019, Volume 45, Number 1, pages 20–34, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.WoltersKluwerLR.com