Many employees in today’s workforce find themselves with a large amount of student debt and the expense of paying down that debt can keep them from contributing to their retirement plan. In the face of this, employers are increasingly exploring the option of adding a match provision to their 401(k) plan for participants who make payments on student loans.
In 2018, a 401(k) plan added a provision to match 5% of compensation to participants who make student loan payments equal or greater to 2% of their compensation. An equal match contribution is alternately available to participants who make deferral contributions for this amount. The IRS has made a Private Letter Ruling on this specific plan, finding that it did not violate the “contingent benefit rule.”
At this time there are significant hurdles to putting such a provision in place. Not only has the IRS provided little guidance for adding similar provisions to retirement plans, but adding one could well detrimentally impact a plan’s ADP/ACP testing.
While at least one other plan has adopted similar provisions based on this ruling, the IRS letter pertains only to this specific provision in this specific ruling. Given the recent attention and interest, it is possible that the IRS may make a wider ruling in the near future. Additionally, legislation for creating similar provisions has been introduced by multiple members of both the House and Senate on both sides of the aisle, although nothing is expected to be passed in the immediate future.
For most retirement plans, it would not be practical to add a student loan match provision at this time, but this could change with the passage of new law or with a new ruling by the IRS. We will keep you informed of any such updates.