Employee Student Loan Assistance Enters the Retirement Arena

A new groundbreaking ruling by the Internal Revenue Service (IRS) clears the way for employers to allow employees with student loan payments to qualify and receive an employer-funded 401(k) match — even if they aren’t saving for retirement. Student debt is becoming a big problem. According to the Federal Reserve Bank of St. Louis, more than 44 million Americans hold nearly $1.5 trillion in student debt, meaning that about one in four American adults is paying off student loans. How much are those loans? The Wall Street Journal reports that the average student loan borrower has $37,172 in student loans when they graduate. The result is that many employees are reluctant or unable to save for retirement when they’re still trying to pay down their debt. Employers, wanting to attract young, talented employees, have been looking for ways to help employees manage debt by offering signing bonuses; additional compensation based on current debt payments; and direct payments on outstanding loans. Now there is another option.

Abbott currently offers a 401(k) plan and provides matching contributions if employees each contribute at least two percent of their wages into the plan. The company wanted to establish a new Student Loan Repayment program (SLR) that extended matching contributions to employees who are making student loan repayments. Abbott asked the IRS if it could offer the student loan repayment program as a component of their 401(k) plan. The IRS issued their response in a Private Letter Ruling (PLR 201833012). The IRS ruling allows employees to receive the equivalent of matching contributions without electing to make their own contributions. The ruling opens the door for other companies to also introduce tax-advantaged student loan benefit programs. Abbott’s SLR program makes a non-elective employer contribution to the 401(k) if an employee makes a student loan repayment equal to at least 2 percent of compensation and no more than five percent. And, while the employer makes a retirement plan contribution for the employee regardless of whether the employee contributed to the 401(k) plan, the employee must enroll before the end of the plan year to participate. They can also opt out of the program. To qualify, employees must meet 401(k) eligibility and vesting rules, and they cannot receive both regular and SLR matching contributions. Contributions under SLR are tax-deferred for the employee and tax deductible for the employer.

The Private Letter ruling on the SLR Program is a good first step, but attorneys say the IRS needs to offer guidance before employers can offer similar programs without having to ask for a Private Letter Review (which can take up to year or more to get). For instance, some obstacles that need to be overcome before implementing the plan include determining:

Whether your program is legal if your SLR design differs from the provisions approved by the IRS.How to track and verify employees’ student loan payments and confirm payments were made.How the payroll system will know when a matching payment should be stopped.Whether rules governing safe harbor plans could limit an employer’s ability to offer this feature. For a 401(k) plan to be considered a Safe Harbor plan, employers must satisfy certain contribution, vesting and notice requirements.How to track non-elective contributions.What kind of student loans will be eligible for their programs. For instance, should personal and family loans be included as well as government and bank loans?What the costs of this type of program will be, particularly since employers don’t know the full amount of employees’ student loans.