The Internal Revenue Service (IRS) recently gave its blessing to an employer-provided student loan repayment benefit offered through an employer’s 401(k) Plan.  Specifically, the guidance confirmed that, under certain circumstances, employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) Plan to the amount of student loan repayments made by the employee outside the plan.

Although the IRS guidance did not directly address 403(b) Plans in its guidance, because the definition of "contributions" for 403(b) Plans includes the definition of employer contributions under 401(k) Plans,a student loan benefit should also be available to employers who offer 403(b) Plans.

Rising Student Loan Debt Raises Concerns

For the past few years employers have searched for ways to make employee benefits packages more appealing to prospective and younger employees and to find ways to expand employee education opportunities to help integrate retirement savings and healthcare coverage choices with comprehensive financial wellbeing.

A more recent discussion within this framework includes benefits to assist employees with rising student loan debt.  Managing student loan debt has become an increasingly significant concern not only for employees entering the workforce, but also for older workers who are either still paying their own debt or taking on school debt for their children. As employees are placing an increased value on the availability of employer-provided student loan repayment assistance, employers are contemplating various ways to provide such a benefit.

One idea floated by forward-thinking companies is an incentive within employer defined contribution plans to offer assistance with student loan repayments while at the same time helping with retirement savings.  To date, employers have been reluctant to create student loan benefit programs that specifically link 401(k) Plan contributions to student loan repayments because of some limiting language in the 401(k) regulations.

The student loan benefit program detailed in the IRS guidance includes a number of key features:

  • Participation in the student loan repayment benefit program is voluntary

  • The student loan repayment benefit effectively replaces the employer matching contribution for an employee who chooses to participate in the program

  • The student loan repayment benefit is subject to coverage and nondiscrimination testing, as well as other applicable requirements for qualified retirement plans, including contribution limits, eligibility, vesting and distribution rules

  • Employees aren’t eligible to receive any more in total contributions under the 401(k) Plan than they would otherwise be entitled to receive in regular matching contributions

This ruling from the IRS provides a student loan repayment benefit option that can be implemented without increased benefit costs for employers who are already making employer contributions to qualified retirement plans. 

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