401k Student Loan Repayment Programs Give Retirement Readiness a Big Boost
401k Student Loan Repayment Programs are poised to give 401k participants a new advantage in retirement planning. Financial wellness in the workplace may be evolving to include 401k student loan repayment benefits for those participants who are burdened with college debt. Many employers are already on board conceptually and more are likely to follow suit, pending clarification of regulatory issues.
BenefitsPro brought an interesting situation to light in a recent article, citing a recent private letter from the IRS to an anonymous plan sponsor – ruling that participants in the 401(k) plan can receive the employer contributions without the employee participant making their own contribution to their own participant account. This can occur when an employee can show evidence that they have made payments toward their student loan debt. The 401k student loan repayment program being referenced offers a generous 5% matching contribution after an employee makes student loan payments at a rate of at least 2% of employee compensation. Under the IRS’s ruling, the employer can still match 5% to an employee’s 401(k) account if a participant chooses to defer at least 2% of their salary to repay their student loans. Essentially, the letter permits the sponsor to provide a match for employees who are paying down student loan debt instead of saving for retirement. However, to be clear, the match would go toward the employee’s retirement savings participant account and would not be made to pay off student loan debt.
The BenefitsPro article mentions some other provisions that participants must follow: first, they have to opt in to what the IRS describes as a 401k Student Loan Repayment Program (SLR – student loan repayment). And if the employee doesn’t make an SLR of at least 2% of their salary during a pay period, but defers 2% to their 401(k), they still get the 5% match from their employer. In other words, as long as employees make a 2% deferral to repay their student loans or save for retirement, they are eligible to receive the 5% employer match.
There are still details to be resolved, but a move like this could be a major win for 401(k) financial wellness. It seems to solve the conundrum of employees having to choose between saving for retirement or paying down their student loans. In theory, they’ll be able to do both if more employers begin to adopt and implement 401k student loan repayment programs in their retirement plans. Such a move would alleviate a lot of financial stress for employees, making for a more happy, focused and productive workforce. Also, by focusing their finances toward a singular goal through a 401k student loan repayment program, employees can pay down their student loans faster. The 401k student loan repayment program helps participants to divert their earnings toward saving for retirement. In the meantime, workers still benefit from employer matching contributions to help them build their retirement nest egg.
According to Federal Reserve data cited by BenefitsPro, 45 million Americans hold a staggering total of $1.52 trillion in student loan debt, accounting for the second largest source of consumer debt behind mortgages. That creates a significant barrier to an employee’s ability to save for retirement, and growing numbers of defined contribution (DC) plan sponsors are taking notice. In fact, one in five plan sponsors with more than 1,000 participants were considering adding a student loan repayment benefit in the workplace, according to a 2016 Plan Sponsor Council of America (PSCA) study, again cited by BenefitsPro. Nonetheless, only 1.4% of sponsors PSCA surveyed offered a student loan repayment program. Clearly, this is an improvement in its infancy, and a big reason for that is the lack of regulatory guidance on whether 401k student loan repayment programs can be integrated into 401(k) and 403(b) plans.
The IRS ruling mentioned above is applicable for only a single case. This cannot be interpreted as widespread permission for all plan sponsors. Questions do remain as to how employers might choose to implement a 401k student loan repayment program. This becomes a process for improving 401(k) plans with a financial wellness benefit, that can co-exist amidst a strong regulatory environment. That said, the conversation is ongoing. Additionally, there are companies and vendors that are proactively developing solutions to assist employers in helping workers to address the 401k student loan repayment programs. So, while 401k student loan repayment programs are still a relatively uncharted territory in the 401(k) financial wellness arena, they are a topic for conversation and future consideration. As employers continue to look for ways to assist their employees in taking control over their financial future, the 401k student loan repayment program represents an encouraging step toward improving financial wellness. One that we are likely to hear a whole lot more about.