Are Student Loan Repayment Benefits Available for Any and All 401(k) Plans? by Mike Bourne, AIFA
Short answer is, “Not, yet.” The Internal Revenue Service (“IRS”) released a Private Letter Ruling (“PLR”) on August 17, 2018, giving its approval to a plan sponsor to incorporate Student Loan Repayment (SLR) benefits into its 401(k) plan. The release of this PLR has triggered a significant amount of enthusiasm regarding SLR benefits within 401(k)s, so let’s summarize what we know and what we hope.
What we know about the PLR…
First and foremost, the IRS was very clear in the PRL (as in all PLRs) that its approval was only to the plan sponsor who made the request and only for that company’s specific 401(k) plan design.
This plan sponsor’s 401(k) plan had a generous matching program that provided for a 5% of compensation match if the employees contributed at least 2% of compensation. It’s not common for an employer to match significantly more than their employees are contributing, particularly at such a low rate of deferrals. One could argue that this generous match reduces the incentive for employees to contribute more than 2% to their retirement savings, but that’s a separate issue best left for another day. (FYI, Abbott Laboratories confirmed a couple of weeks later to the Chicago Tribune that it was the employer that received the PLR.)
The SLR benefit that was requested and approved works as follows:
- Assume an employee is paid $5,000 monthly.
- The employee makes payments directly to the student loan servicer and submits documentation to the employer.
- If the employee makes payments of at least $100/month (2% of $5,000) on student loans, then the employer would make a nonelective (i.e., profit sharing) contribution of $250 (5% of $5,000) to their 401(k) plan. Although this is technically not a matching contribution, the effect is to “match” the student loan payment in the same way that the plan matches employee salary deferrals.
- The employee can still defer compensation (i.e., elective contributions) into the 401(k) plan if the student loan repayments aren’t sufficient to reach the 2% matching threshold. In other words, a combination of student loan repayments and deferrals can be used to meet the matching threshold.
The employee, of course, must be eligible for the 401(k) plan and must be an employee at the end of the year in order to qualify for the nonelective contribution.
What we hope SLR benefits accomplish…
It’s hard to ignore that student loan debt could be preventing many from saving for retirement. Student loans now total $1,400,000,000 nationally (that’s a lot of zeros), and are now the largest portion of non-housing (i.e., mortgages) consumer debt in our country – larger than auto loans at $1.2 trillion and credit card debt at $0.8 trillion.
It’s quite possible that many employees would like to defer compensation at the maximum matching thresholds offered by their employers, but they simply don’t have the cash flow to do so after making student loan payments. In other words, employees are likely leaving employer matching funds “on the table.” Under the PLR, Abbott Laboratory employees receive “credit” towards employer matching thresholds by making their student loan payments. If expanded to more employers, SLR benefits in 401(k) plans could by helping reduce the number of student loan defaults. Employees would likely give higher priority to payments in their household budgets because they effectively generate additional retirement plan contributions.
So, can I have an SLR Program in my 401(k) plan?
The IRS needs to expand and clarify the PLR, which some retirement industry bodies have requested, but the IRS has declined to comment on whether it will be issuing broader guidance. This leaves several questions unanswered. For instance, we don’t know something as basic as how far a plan sponsor must go to substantiate that the payments are truly going towards student loans. No employer wants to have its plan disqualified for all employees by trying to help a segment of its workforce (e.g., those with student loan debt) with retirement readiness.
The current bottom line is that the PLR is narrow in its scope, so that an employer trying to copy the SLR program is taking some risk unless it applies for its own PLR – a costly proposition, since the user fee to the IRS is $10,000, and there will also be legal or other professional fees to prepare the application. Hopefully, we will see general guidance sooner rather than later.
Mike Bourne, AIFA, Atessa Benefits
Mike joined the company in 2009 as Chief Financial Officer and Chief Compliance Officer. During his 23-year career, Mike has served as COO and CFO in companies ranging from pre-revenue stage to over $100 million in revenues, primarily in manufacturing, aerospace & defense, automotive, recreation and leisure, and the professional services sectors. In those roles he has led two turnarounds, restructured and improved the performance of five financial teams, driven operational excellence for two vastly different business models, and led several M&A activities.