IRS Rules That Cake and Ice Cream Go Together In a 401(k) Plan

By Jim Griffin

Okay.  You’re right.  That is just a catchy headline.  The IRS didn’t really say anything about cake or ice cream.  But the IRS did say that employees could get a contribution (sort of like cake) inside a 401(k) plan as a reward for paying down their student loan debt outside of the 401(k) plan (sort of like ice cream).  So when you put it all together, the IRS says that you can have your cake and eat it too—with ice cream!

Overall, this is a pretty good ruling that has human resources professionals talking and trying to figure out the details.   Unfortunately, there are not too many details, but the IRS is trying to figure out whether this cake and ice cream ruling is a good thing or not.  You can read the entire ruling for yourself by searching for Private Letter Ruling 201833012, issued on August 17, 2018.

Representatives of the IRS in Washington are under the impression that employers have many young employees who are covered up with student loan debt.  They have so much debt, in fact, that they have no money to save for the future, and they are missing out on matching contributions in their employers’ 401(k) plans.  To the IRS this seems like a vicious cycle from which there is no obvious or easy exit.

Against this background, one employer thought that it had a better idea, and the IRS agreed.  The employer could give employees a 401(k) contribution either the old way for saving inside the 401(k) plan or the new way for paying down their student loan debt outside of the 401(k) plan.  This describes the heart of the IRS ruling but leaves out the nitty gritty details.

One of those details is that the IRS ruling is private.  That means that it only applies to one employer.  Other employers either have to get their own ruling or take the risk that the IRS will not change its mind.  Another detail is whether the 401(k) recordkeeping industry will make the necessary adjustments to their systems so that the cake and ice cream ruling can be easily and efficiently made available to other employers.  There are also lots of details in the IRS testing area that need to be considered and discussed.  Another good question is whether an employer’s employees will see this as beneficial.  Some say that the cake and ice cream ruling has a potential powerful impact on recruiting and retention of younger employees.  This probably varies from employer to employer.

The IRS ruling on student loan debt repayment is quite new.  Employers are just now beginning to talk about the ruling and whether it is a fit inside their own workforce.  Time will tell whether the ruling is just a fading fad or the next best thing to happen to 401(k) savers since catch-up contributions.  (I couldn’t resist that one).

Jim Griffin is an attorney with Scheef & Stone, LLP in Dallas.  He may be reached at  

Your employee benefits advisor at Montgomery Coscia Greilich LLP can assist you in evaluating whether the student loan repayment 401(k) contribution works for your company.