Unique way to help workers enrolled in plan.


The IRS just gave the green light to a new type of 401(k) contribution strategy to help workers who are paying back student loans.


Here’s the latest guidance from the agency, along with how this type of plan would impact Payroll.


Program details


In a private letter ruling, the IRS was asked to evaluate a student loan benefit program administered through a company’s 401(k) plan.


As a part of the program the employer would make a nonelective contribution to the plan on behalf of any employee making student loan payments.


Participating employees could make their own elective contributions to the plan, but they wouldn’t be eligible for the traditional employer match.


Instead, if, during a pay period the employee made a student loan payment that’s equal to at least 2% of their eligible compensation, the employer would make a nonelective contribution equal to 5% of the worker’s eligible compensation at the end of the plan year.


During a pay period where the employee didn’t make a student loan payment, but made an elective contribution to the plan equal to at least 2% of their eligible pay, the company would make a true-up matching contribution of 5% of the employee’s eligible, compensation at the end of the plan year.


The IRS said this program doesn’t violate the law that bans benefits being contingent on 401(k) contributions because nonelective contributions are based on whether an employee makes a student loan payment, not whether the employee makes elective contributions. Also, employees are still able to make elective contributions if the wish.


Implications for Payroll


This decision paves the way for companies to use similar strategies to help those struggling with student debt.


Since contributions are based on compensation during each pay period, it’s likely you’ll be involved if your company’s interested in creating a similar student loan benefit program.


It’d be a good idea to start thinking about some of the challenges now, including how to track when employees make load payments and how that aligns with your regular pay periods.


Cite: bit.ly/loans562