Pay Student Debt or Save for Retirement? Qualified Employees Could Do Both
With student loan debt having tripled to $1.5 trillion in the last 10 years, and fewer people saving for retirement, the IRS is clearing the way to allow employees to benefit from repaying their debts. Borrowing for education affects many facets of former college students’ lives and limits how they can save for the future. Studies show that college graduates with student debt accumulate 50 percent less wealth in their 401(k) accounts by age 30 than those without such debt. But a solution may be on the horizon thanks to one company’s inventive method of tackling this dilemma for their employees.
On August 17, 2018, the IRS issued Private Letter Ruling 201833012 (PLR) in response to a request from taxpayer Abbott Laboratories to allow a student loan benefit program under its employee 401(k) plan. By issuance of the PLR, the IRS approved the provisions in Abbott’s plan, allowing the employer to contribute to the 401(k) plans of its employees who are repaying student debt at a certain minimum level without them having to make any 401(k) contributions of their own.
How do student loan repayment provisions look in the Abbott plan?
Under the traditional Abbott plan, employees who make salary deferral contributions to a 401(k) can receive an employer matching contribution of up to 5 percent of their compensation. Under Abbott’s new Freedom 2 Save Plan, employees who are making student loan repayments (SLRs) that are at least 2 percent of their eligible compensation will receive an employer contribution equal to 5 percent of their pay — without them having to contribute anything of their own. Ultimately, the eligible employee is given the freedom to pay down student debt, while still reaping the benefits of an employer contribution.
Employees who take advantage of this new plan benefit will remain eligible to make salary deferral contributions to their 401(k). But, during the time eligible student loan repayments are being made, salary deferrals contributed by the participants will not be matched. In other words, the ruling allows plan sponsors to make a 5 percent employer contribution based on student loan repayments. This is in place of the matching contribution, which is typically based on salary deferral contributions. If the SRLs cease, then the company will make up matching contributions at the end of the plan year.
Under the Abbott plan, the 5 percent employer contribution will be made after the end of the tax year to participating employees who are still employed on the last day of the plan year (unless the employee suffered from disability or death). The SRL contribution will be subject to the same vesting schedule as the plan’s regular matching contributions, while non-discrimination and coverage testing rules will apply.
The IRS confirmed Abbott’s proposal did not violate the contingent benefit rule (a concern, since the new benefit is directly contingent on an employee making student loan repayments).
Making the provision available to all employers
Employers should take caution before adopting such provisions in their qualified retirement plan, as the PLR applies solely to Abbott. The current IRS approval letters do not address student loan provisions, so adopting employers have no regulatory reliance in this regard. That said, document providers are drafting universal language to be incorporated into the next round of IRS plan document restatements, which we can expect to see on or before spring of 2020.
The popularity of this benefit will have the primary effect of increasing nest eggs for those with student debt and also has the potential to:
- Attract and retain employees
- Allow employers who offer this benefit to be more competitive with industry peers
- Increase tax savings for the employer
- Encourage increased participation rates and retirement savings
- Incentivize employees to pay down their student loan debt earlier
In December 2018, Senator Ron Wyden, ranking member of the Senate Committee on Finance, introduced legislation to allow qualified retirement plans to include features similar to those in the Abbott plan. The bill addresses some key concerns, such as what type of evidence employers will require in order to prove a student is making loan repayments, and how this benefit will affect nondiscrimination testing. Wyden’s Retirement Parity for Student Loans Act provides that a 401(k) plan with these features will qualify as a safe harbor plan for nondiscrimination testing purposes, and the legislation would ize the Department of the Treasury to determine the conditions for verifying the student loan repayments. If approved, the bill would be effective for plan years beginning after 2019.
Various record-keeping firms have already begun enhancing their software in anticipation of these changes.
How we can help
CLA’s retirement plan services team is at the forefront of this exciting new benefit and will continue to monitor developments as they become available.
CLA’s retirement benefits professionals can help you review your current plan design and communicate insights that will improve the administration of your plan, and help you and your employees accomplish your objectives.
- Denise Falbo