Student Loan Repayment Benefit Approved by IRS in Private Letter Ruling
On August 17, 2018, the Internal Revenue Service (IRS) released a Private Letter Ruling (PLR) approving employer 401(k) matching contributions based on an employee making student loan payments. The PLR approves a benefit for a workforce that is increasingly burdened with student loan debt, and is the latest in an overarching effort of government and employers to help relieve this burden. Specifically, the approved design allows the employer to provide a match of 5% of the employee’s compensation for pay periods in which employees make student loan payments of at least 2% of their eligible compensation, even if they don’t contribute to their retirement account. Employees in the program are required to waive 401(k) matching contributions, so they are not doubly compensated if they already contribute to their retirement plan. Note that this PLR is only applicable to the taxpayer requesting the ruling and does not address certain other tax issues that could impact a similar plan. However, the ruling indicates the IRS’s willingness to examine this type of arrangement, and may lead to additional interest in this type of uniquely designed employee benefit.
Retirement Recommendations by the IRS Advisory Committee
In June, the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) released a series of recommendations to the IRS’s Employee Plans division. The recommendations primarily focused on compliance issues presented by missing participants and the potential expansion of the determination letter (DL) program.
Missing participants: the report noted that missing participants create significant compliance challenges for plan sponsors. The ACT recommends that the IRS issue additional guidance to help plan sponsors maintain compliance when missing participants cannot be found. The recommendations to the IRS include an expansion of enforcement relief, confirmation of forfeitures subject to reinstatement, and an increase of the cash limit for making automatic rollovers.
DL program: under current IRS procedures, the DL program allows individually designed retirement plans to obtain a DL, establishing the plan’s qualified status, in limited situations, including initial plan qualification, plan termination, and unspecified other limited circumstances. The IRS has requested comments on a possible expansion of the DL program in 2019. The ACT recommends the IRS allow for “limited scope” DLs in additional specific instances, such as major changes in the law, major business transactions, and plan design changes. Further, ACT recommends that the IRS allow DLs for plans that are not currently able to request a pre-approved plan opinion letter such as multi-employer plans, certain governmental plans, hybrid plans, and complicated employee ownership plans.
Retirement and Savings Bills
In July, a bi-partisan group of Senators have introduced four bills together, with the goal of making retirement plans and saving accessible to more workers:
- The Retirement Security Flexibility Act would incentivize employers to use auto enrollment and auto escalation of contributions while providing additional flexibility on the safe harbor employer contributions.
- The Small Business Employees Retirement Enhancement Act would allow employers with fewer than 100 employees to band together to form multiple employer plans called “pooled employer plans” (PEP) without requiring they share a common nexus, while potentially shifting some fiduciary responsibility to the PEP’s independent, third-party service provider.
- The Strengthening Financial Security Through Short-Term Savings Act allows employers to limit early withdrawals from retirement accounts facilitate short-term savings by auto enrolling employees into emergency savings accounts with a maximum account balance of $10,000.
- The Refund to Rainy Day Savings Act would allow taxpayers to make an election to defer receipt of their tax refund for 180 days, at which point the deferred amount would be paid with interest.
IMPORTANT DISCLOSURES: These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—Arnerich Massena cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.