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Defined Contribution

IRS letter likely to increase use of student loan repayment options

Plan sponsors interested in helping employees deal with student loan debt as part of their defined contribution plans got a positive signal from the IRS through a private letter ruling released Aug. 17.

The IRS letter, dated May 22, came in response to a sponsor's August 2017 request to amend a defined contribution plan to also offer a student loan benefit program. The plan sponsor was not identified in the IRS letter, but in June, Abbott Laboratories announced a student loan program feature after receiving an IRS private letter ruling.

According to the IRS letter, the original plan allows for a 5% employer match for the defined contribution plan, which will continue for employees not enrolling in the student loan benefit program.

If an employee makes a student loan repayment during a pay period equal to at least 2% of pay, the employer will make a student loan repayment, non-elective contribution "as soon as practicable after the end of the year" equal up to 5% of employee compensation, the IRS letter said.

The employer's student loan repayment contribution "is made without regard to whether an employee makes any elective contribution throughout the year," the letter said. Regular employee contributions to the defined contribution plan are eligible for employer matches, as long as the employee is employed in the last day of the plan year.

Both types of employer contributions are subject to the same rules on vesting and plan qualifications as regular matching contributions, the IRS noted.

The IRS private letter ruling does not apply to other employers or plan designs.

There is growing interest among employers to help employees address student loan debt as part of their overall retirement savings goals, panelists noted at a Tuesday hearing on financial literacy held by the Senate HELP Committee's subcommittee on primary health and retirement security.

With the recent IRS letter, "you'll probably see more uptake," Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council in Washington, told the panel.