For many employees, contributing to a retirement plan is often easier said than done. This is especially true for employees who enter the workforce with significant student loan debt. As a result, employers are now asking themselves how they can help their employees ease the financial burden of student loan debt so that these employees will be more willing (and able) to contribute money to the employer’s retirement plan. One mechanism that some employers have utilized is a direct student loan repayment program. Although making direct student loan payment(s) is an effective way to reduce an employee’s total student loan debt, these programs do not guarantee those employees will actually contribute to the employer’s retirement plan. Furthermore, the money that an employer contributes is taxable to both the employer and the employee.
Recently, however, the Internal Revenue Service (IRS) has issued guidance confirming that there may be a new—and tax favored—way to help employees reduce their student loan debt while at the same time saving for retirement. In a Private Letter Ruling (PLR) released in August of this year (PLR 201833012), an employer proposed the following basic structure for the employer’s student loan/”401(k)” contribution program: if the employee provides the employer proof that the employee uses at least two percent of his/her compensation to pay down the employee’s student loan debt each pay-period, then at the end of the plan year, the employer will contribute five percent of the employee’s eligible compensation to the employee’s “401(k)” plan for each pay-period during which the employee made the requisite student loan payment.
The program also contains the following elements:
- The employee must elect to enroll, and may opt out of enrollment on a prospective basis;
- If the employee enrolls, the employee will still be eligible to make elective contributions to the plan, but would not be eligible to receive regular matching contributions while the employee participates in the program;
- All employees eligible to participate in the plan are eligible to participate in the program;
- If an employee initially enrolls in the program but later opts out, he/she will then become eligible for regular matching contributions;
- If the employee does not make a student loan repayment for a pay period equal to or greater than two percent of the employee’s eligible compensation, but does make an elective contribution during that pay period equal to at least two percent of the employee’s eligible compensation for that pay period, the employer will make a true-up matching contribution to the employee’s “401(k)” plan at the end of the plan year equal to five percent of the employee’s eligible compensation for such pay period;
- In order to receive either the student loan repayment matching contribution or the true-up contribution, the employee must be employed by the employer on the last day of the plan year; and
- All of the contributions made under the program will be subject to the same vesting schedule as regular matching contributions.
In the PLR, the IRS, among other things, does not express an opinion with regard to any additional qualification or nondiscrimination issues that could arise as a result of this program.
So what does this mean for employers? Has this guidance provided a foolproof solution to paying down student loan debt and saving for retirement? Unfortunately, it does not, although the reasoning appears to be sound.
First, the PLR is limited to the particular facts presented to the IRS. Therefore, it is uncertain whether a different, albeit similar design would be approved by the IRS. Second, this design does not allow for double dipping of the traditional matching and student loan non-elective contribution. In other words, if an employee was already contributing two percent of his/her compensation to the “401(k)” plan, that employee would already be eligible for the five percent matching contribution and he/she would not actually realize a benefit by participating in the program.
As a result, this program could actually disincentive an employee who would have otherwise contributed the two percent of his/her compensation to the “401(k)” plan in order to receive the matching contribution, from doing so. Third, there are other potential compliance concerns, in particular, whether an employer offering this kind of program will pass nondiscrimination testing.
Ultimately, even though this program may not be a magic bullet to solve the conundrum of how an employee can save for retirement and pay his/her student loan debts, it is unquestionably innovative, and depending on the employer, this kind of program may be a viable option to help its employees save for retirement while at the same time continuing to pay down their debt.
To Know More:
For additional information, please contact a member of the Polsinelli Employee Benefits and Executive Compensation practice group, including one of the authors listed above.