Student Loans vs Retirement Savings: IRS Rules Support Employers Addressing the Contribution Clash

  • The IRS has issued a private-letter ruling permitting an employer to make contributions to a 401(k) plan based on employees’ repayments of student loans.
  • For employees with too much student debt to make plan contributions, this could help provide retirement savings.

In August, the IRS released a ruling in which it considered an employer’s proposal to offer a voluntary program under which the employer would make a contribution to employees’ 401(k) accounts based on amounts paid by the employees to repay a student loan.  The IRS ruled that such a program would not violate a Treasury regulation that generally prohibits retirement plans from conditioning most plan benefits on whether the employee chose to contribute to the plan instead of receive cash.  The IRS reasoned that the employer’s student loan-based contributions to a 401(k) account would be conditioned on whether the employee made a student loan payment — not on whether the employee chose to make contributions to the 401(k) plan.

Although the IRS ruling in this case only applies to the employer who requested it, it has generated a good deal of interest from the employer community insofar as it serves as a helpful indication of how the IRS could view other similar benefit programs.  A legislative proposal released by Senator Ron Wyden (D-OR) two years ago addresses this same issue — basing employer contributions to a plan on student loan repayments — and would make such an arrangement even easier to maintain.


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Exp. July 31, 2021