In a recent private letter ruling the IRS approved an employer’s proposal to amend their 401(k) Plan to allow a student loan repayment to substitute for an employee’s deferral to the 401(k) Plan and still receive matching employer contributions. The exciting news is that an employer potentially could tie a retirement plan matching contribution to an employee payment outside of the 401(k) Plan. This allows an employee paying on a student loan to save for retirement on a tax-deferred basis while continuing to make their student loan payments and receive the full matching contribution from their employer—without the required 401(k) Plan contribution. There are however, many additional requirements and unknowns around how this arrangement will work and how it will be accounted for and managed.
Private letter rulings may not be relied upon as binding legal authority—except by the organization that requested the ruling. However, historically such rulings provide a good indication of where the IRS and other ruling authorities are leaning and offer guidance to plan sponsors. Previously, employer- offered student loan assistance came solely in the form of additional taxed compensation. With this IRS letter, the door is opened to tie student debt assistance to a tax-advantaged employee benefit program.
This new direction is welcome news for the 4 in 10 adults under 30 years of age who have student loan debt. Currently, total student debt is approximately $1.4 trillion with an average monthly payment of about $350, according to the Federal Reserve.
The sheer magnitude of student debt and the number of employees affected has made it a key topic of consideration for employers. Attracting and retaining talent is an ongoing concern for organizations and benefit programs are challenged more and more to help compete for talent. Many retirement plan recordkeepers are establishing partnerships with third parties to provide opportunities for employers to offer student loan repayment, consolidation and other assistance. We expect that other leading recordkeepers will build connections to supporting third-party student debt assistance programs in the future.
If employers are thinking about the value of enhancing their benefit program with student debt assistance, a good place to start is with overall employee demographics, e.g. age, tenure with the employer, salary bands and level of participation in the existing retirement plan. This type of analysis is unrelated to the focus of the recent private letter ruling. But, reviewing this data can help determine the burden of current student debt among your employee population and if an assistance program would be of value to them. In addition, it might be useful to know if such programs are offered by other organizations that compete for your talent.
If you are interested in exploring a student debit assistance program, PEI suggests you consult with both your recordkeeper (to see what is available through their platform) and your ERISA counsel to consider plan design options.