Tag Archive for: 401(k) student loan repayment

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Fully Discretionary Match Meets Definitely Determinable Benefit Rule

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An advisor asked:  “I read recently in a TPA’s annual letter that there is a new mandate to provide a written disclosure of the match formula in years where a plan makes a discretionary match. Can you provide some details?”    

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.

Highlights of the Discussion

Sponsors of 401(k) plans that utilize pre-approved plan documents are facing an IRS-mandated, cyclical restatement process (“Cycle 3 Restatement”). Every six years, plan providers must update their 401(k) documents for recent law and regulatory changes and file them with the IRS for pre-approval (or re-approval). In turn, employers who use these documents must adopt an updated pre-approved plan, in this case, no later than July 31, 2022 (IRS Announcement 2020-07).

There are new requirements with this restatement for businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans. With respect to these fully discretionary matching contributions, the IRS made it clear to document providers that their documents must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(i), which states a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to include language that complies with the definitely determinable mandate, and adopting employers will have to

  1. Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing
  • How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
  • The computation period(s) to which the discretionary matching formula applies; and, if applicable,
  • A description of each business location or business classification subject to separate discretionary match formulas.
  1. Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

The first year for which this communication is required is the plan year following the year the employer signs the restatement.

Example:

ABC, Inc., restates its calendar year 401(k) plan in 2021—even though it could wait until as late as July 31, 2022. Based on this timing, the communication is first due for the 2022 plan year.  If ABC Inc., completes making the 2022 matching contribution April 1, 2023, then the deadline to provide the participant communication is May 30, 2023.

As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these new requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.

Conclusion

Pre-approved defined contribution plans are in a restatement cycle that must be completed by July 31, 2022. Employers that use a pre-approved plan and give a fully discretionary matching contribution must satisfy additional participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.

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Linking Student Loan Repayments and 401(k) Plan Contributions

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“I’m hearing more and more about 401(k) plans that allow participants to receive employer matching contributions based on their student loan payments. Is this permitted? What about the contingent benefit rule?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Colorado is representative of a common scenario involving 401(k) participants with student loan debt.

Highlights of the Discussion

According to the Federal Reserve, student loan debt has reached a staggering amount: $1.52 trillion. For many younger workers it has become a huge stumbling block to achieving financial wellness, including saving for retirement. A new in-plan approach to addressing student loan debt is to provide some kind of loan repayment incentive through the employer’s 401(k) plan. The industry has been hearing more and more about such arrangements, especially following an IRS private letter ruling (PLR) issued in 2018 to Abbott Laboratories and new proposed legislation in 2020.

PLR 201833012 cracked open the door to encourage retirement savings by those saddled with student loan debt. In the method approved by the IRS in the PLR’s scenario, an employee with student loans was be able to enroll in his employer’s 401(k) plan, make monthly student loan payments to the loan servicer outside of the plan, and have his employer make “student loan repayment nonelective contributions” into the employee’s 401(k) retirement account that “matched” the participant’s loan payment, up to a certain amount.  Since the nonelective contribution was not contingent upon making employee salary deferrals, the plan did not violate the “contingent benefit” prohibition of Treasury Regulation §1.401(k)-1(e)(6).  The contingent benefit rule prohibits conditioning the receipt of other employer-provided benefits on whether an employee makes employee elective salary deferrals. Receiving matching contributions is the sole exception to this rule. The PLR did not address whether the plan meets other qualification requirements under IRC Sec. 401(a).

A PLR may not be relied on as precedent by other taxpayers. Consequently, while the interest of plan sponsors is there to use their companies’ 401(k) plans to help employees reduce student loan debt and improve financial wellness, and a few companies have stuck their toes in the water, the general uncertainty of how the feature would affect a plan’s overall qualified status in the eyes of the IRS still hinders its widespread adoption.

To help curb employer reticence, there is currently a proposal before Congress entitled the Securing a Strong Retirement Act of 2020 that includes Section 109: Treatment of student loan payments as elective deferrals for purposes of matching contributions. Under the bill, an employer would be permitted to make matching contributions under a 401(k) plan, 403(b) plan, or Savings Incentive Match Plan for Employees (SIMPLE) IRA plan with respect to “qualified student loan payments,” the definition of which is broadly defined as any indebtedness incurred by the employee solely to pay “qualified higher education expenses” of the employee. Similarly, governmental employers would also be permitted to make matching contributions in a 457(b) plan or another plan with respect to such loan repayments. This would essentially treat an employee’s student loan payment as an elective deferral.

Regardless of what happens to SECURE Act 2.0, the IRS has made guidance on the connectivity of student loan payments and qualified retirement plans (including 403(b) plans) at top priority for 2021.[1]

Conclusion

Employers are focusing on employee financial wellness, including adopting measures to help alleviate student loan debt and encourage retirement savings. One enticing option that advances both goals, potentially, is linking student loan repayments with 401(k) plan contributions. The industry can anticipate more guidance in 2021—whether in the form of new Treasury Regulations or federal law.

[1] IRS 2021 Priority Guidance Plan

 

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