In PLR 201833012 the IRS ruled that it was acceptable for an employer to amend its 401(k) plan to provide a nonelective contribution for employees who make qualifying repayments on their student loans.

The letter explains the benefit as follows:

Taxpayer proposes to amend the Plan to offer a student loan benefit program under the Plan (the “program”), under which Taxpayer would make an employer nonelective contribution on behalf of an employee conditioned on that employee making student loan repayments (“SLR nonelective contribution”). The program is voluntary — an employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions while the employee participates in the program. Such an employee would be eligible to receive SLR nonelective contributions and true-up matching contributions, as appropriate, described below. All employees eligible to participate in the Plan will be eligible to participate in the program. If an employee initially enrolls in the program but later opts out of enrollment, then the employee will resume eligibility for regular matching contributions.

Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee's eligible compensation for the pay period, then Taxpayer will make an SLR nonelective contribution as soon as practicable after the end of the year equal to 5% of the employee's eligible compensation for that pay period. The SLR nonelective contribution is made without regard to whether the employee makes any elective contribution throughout the year. If the employee does not make a student loan repayment for a pay period equal to at least 2% of the employee's eligible compensation, but does make an elective contribution during that pay period equal to at least 2% of the employee's eligible compensation for that pay period, then Taxpayer will make a matching contribution as soon as practicable after the end of the plan year equal to 5% of the employee's eligible compensation for that pay period (“true-up matching contribution”). In order to receive either the SLR nonelective contribution or the true-up matching contribution, the employee would need to be employed with Taxpayer on the last day of the plan year (except in the case of termination of employment due to death or disability). Both SLR nonelective contributions and true-up matching contributions will be subject to the same vesting schedule as regular matching contributions.

The letter also notes:

Taxpayer represents that it has not extended and has no intention to extend any students loans to employees that will be eligible for the program.

The key concern was whether adding such a benefit would run afoul of IRC §401(k)(4)(A) and Reg. §1.401(k)-1(e)(6).

IRC §401(k)(4)(A) reads:

(A) Benefits (other than matching contributions) must not be contingent on election to defer

A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election.

Reg. §1.401(k)-1(e)(6) begins:

(6) Other benefits not contingent upon elective contributions -

(i) General rule. A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee's electing to make or not to make elective contributions under the arrangement. The preceding sentence does not apply to -

(A) Any matching contribution (as defined in § 1.401(m)-1(a)(2)) made by reason of such an election;…

The IRS determined that, under this program, there was not an impermissible benefit conditioned on whether an employee makes an elective contribution to the plan. The letter explains:

In the present case, SLR nonelective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement. Furthermore, because an employee who makes student loan repayments and thereby receives SLR nonelective contributions is still permitted to make elective contributions, the SLR nonelective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash.

Therefore, with respect to your ruling request, we conclude that your proposal to amend the Plan to provide SLR nonelective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6).

However, the IRS cautioned that the ruling is conditioned on the employer not making any student loans to employees eligible for the program.