Legislation Opens Door for Retirement Match on Student Loan Repayments

Sen. Ron Wyden (D-OR), Ranking Member of the Senate Finance Committee, has introduced legislation that would permit 401(k), 403(b), and SIMPLE retirement plans to make matching contributions to workers as if their student loan payments were salary reduction contributions.

Earlier this year the IRS issued a private letter ruling that said that a 401(k) plan can be amended to include a student loan benefit program. The ruling noted that an amendment to the plan to provide student loan repayment (SLR) nonelective contributions under the program would not violate the “contingent benefit” prohibition of Code Section 401(k)(4)(A) and Treas. Reg. §1.401(k)-1(e)(6). However, the ruling applied only to the specific plan and issue in question.

Enter Wyden’s Retirement Parity for Student Loans Act (S. 3771) introduced Dec. 18, which not only opens the door for student loan repayments to qualify for matching contributions, but also provides that a 401(k) plan which provides these matching contributions may continue to qualify as a safe harbor plan for nondiscrimination testing purposes.

Under the terms of the legislation, this would be a voluntary decision on the part of plan sponsors. However, if elected, the benefit must be made available to all workers who are eligible to make salary reduction contributions to the retirement plan and receive matching contributions on those salary reduction contributions. The benefit cannot be provided to workers who are not eligible to participate in the retirement plan.

The benefit only applies to repayments of student loan debt that was incurred by a worker for higher education expenses, and is only available to employees who provide evidence to their employer of their student loan debt payments. (The Treasury Department would be authorized to issue regulations prescribing the conditions under which employers may rely on evidence of student loan debt submitted by workers.)

The bill also notes that the rate of matching for student loans and for salary reduction contributions must be the same. Additionally, special rules apply if a worker makes both salary reduction contributions and student loan repayments. Under those rules, student loan repayments are only taken into account to the extent that the workers has not made the maximum annual contribution to the retirement plan — for example, the annual maximum contribution limit per worker is generally $19,000 for 2019.

The bill also provides clarification on certain nondiscrimination rules that apply to 401(k) plans. These rules restrict the extent to which a retirement plan can benefit highly compensated workers compared to non-highly compensated workers, and include safe harbors that deem the nondiscrimination rules are satisfied if certain matching or other employer contributions are made to the plan.

The bill, which would be effective for plan years beginning after 2019, also clarifies that matching on student loan payments does not violate these safe harbors.

Wyden’s introduction of the legislation was said to be “in preparation for next year when it is expected that broader conversations on how to improve retirement policies will be debated in the 116th Congress.”

A summary of the legislation can be found here.

 

Add Your Comments

One Comment

  1. Tom Nickol
    Posted January 10, 2019 at 10:01 am | Permalink

    This is an exciting development for plan participants. If we can assume that student debt is getting in the way of saving for retirement, then this bill allows for increased participation.

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