Student Loans, Meet 401(k) Contributions

Student loans holding your employees back from adulting? Get ready, because there's a pretty clever benefit on the street that is making an impact on hiring and retention.

On Aug. 17, the IRS made public its Private Letter Ruling (PLR) 201833012, which was issued to the requesting company on May 22. The letter responds to an unnamed employer that proposed amending its 401(k) plan to offer a student-loan benefit program under which it would make special 401(k) contributions into the accounts of employees who are making student loan repayments.

Here's what this means:

A LOT of people have student debt and it gets in the way of being able to do things like contribute to their 401(k), buy a house, etc. Many organizations are starting to offer corporate contributions to help employees pay back their student loans. (By the way, we help organizations design programs and select the appropriate vendor to administer their student loan payback program if you need help.) 

This company in this IRS letter (who we suspect is Abbott Labs) is helping with both debt and building retirement funds. For employees that enroll in their student loan payback program and pay at least 2% of their compensation towards loan payments, the company will deposit a 5% contribution into their 401(k) plan account at the end of the year. If the employee opts out of the program at some point, they'd be eligible for the 5% matching contribution like everyone else who contributes 2% to the 401(k) plan. There's a true-up at the end of the year, and the employee has to be employed on the last day of the year to receive the contribution.

Pretty cool, right? The IRS said this met their requirements and wouldn't violate the “contingent benefit” prohibition of Code Section 401(k)(4)(A) and Treas. Reg. §1.401(k)-1(e)(6). 

Here's what you need to focus on:

The 401(k) plan still has to undergo non-discrimination testing. This type of program is going to work easier in really large companies where most of the people in the student loan plan are non-highly compensated employees. Or, it will work best when you have a clever third-party administrator who will give it some time and attention to figure out how the test can pass. (In other words, if you have a vanilla retirement plan, you're going to need to expect to pay more in administration fees to make this work.)

This type of letter does not establish a precedent for other plans to stand on in the future. It's simply a ruling for ONE plan and ONE company. (But, it does open the door.)

This design could require a custom plan document. The majority of plans these days are on prototypes (or pre-approved, color by number type) so it might be hard to make it work exactly as illustrated above. Custom documents aren't supported by many recordkeepers without an extra fee, especially if your plan is on the smaller side.

Student Loan Payback programs with corporate contributions are NOT covered by ERISA. You don't have to treat everyone the same in these programs like you do in a retirement plan. You can offer this benefit to a few employees, one location, one position, or to everyone. You can structure it as a match, a bonus, a percentage of the employee's payment, a tiered amount, and you can attach it to tenure, bonus metrics, or anything else you can think of, practically. The employee pays the taxes on contributions as ordinary income and the employer does NOT get a tax break for it. (Unless you're the clever company at the top who tied this to their 401(k).)

You will want to work with a third-party provider to administer the student loan program. It's actually a lot of work to make sure that dollars get to the right place, verify loans, and you might want to provide employees with a way to get educated on their loans and refinance. Plus, you'll want your organization to get credit for the years and dollars you're shaving off of their loans!

This problem is real. This solution is real too.  Americans owe $1.5 TRILLION in student loan debt according to the Federal Reserve. In July 2017 Gradifi commissioned a study by Oliver Wyman on the student loan repayment space as a benchmark for the industry. They surveyed 3,000 American households with a bachelor’s degree or higher. 58% of survey respondents with outstanding student debt indicated that they would prefer their employer make payments to help reduce their student debt versus making additional contributions to their retirement funds. 90% indicated student loan repayment would impact their decision to accept a job or stay at a current employer.

According to “Retaining Talent: A Guide to Analyzing and Managing Employee Turnover” from Society of Human Resources Management replacing an employee costs between 90% and 200% of the employee’s annual salary (including both direct and indirect costs). Employee tenure would only need to extend by two months in order for a $100 a month benefit to pay for itself, estimating a $75k annual salary. Employees jumping ship for $1 more an hour affects the bottom line.

Our take? Consider this type of program if your employees have loans or will be taking out loans to help finance their dependents' tuition. Consider it even more if you're having trouble with attracting talent and retaining it.

Need help offering this benefit? Is this a better use of your benefit dollars? We'd be happy to help you sort this out!