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Attract and Retain Top Talent: A 401(k) Plan with Student Loan Benefits

Gregory T. Kepner, AIF®, CRPS®

Retirement Plan Consultant

Student loan debt in America has reached staggering new heights, limiting the ability of many to save for retirement.  That’s why it was big news when the IRS recently approved one company’s program to help employees save for retirement while paying off their student loans.  Before we get into the details of this announcement, lets cover some background on why this is an important topic.

We’re in the midst of an extremely competitive job market and employers should do what they can to enhance their strategy to attract and retain top talent.  As of June 2018, 36% of small businesses were not able to fill open positions due to a lack of qualified candidates1.  How can employers attract those qualified candidates to their company vs. their competition?  Currently only 4% of employers offer student loan repayment benefits to their employees so this could be the differentiator.2  There is a high level of interest from Millennials in this type of program.  Companies that have been reluctant to offer this benefit due to the lack of tax preferred treatment and its fairness among employees is an issue.  Student loan repayment programs benefit those employees who have loans, but what do you offer to benefit employees who have no outstanding student debt?  More on this in a moment.

Millennials will make up 75% of the U.S. workforce by 2025 and employers need to consider ways to increase engagement with employees in this age group.3  They represent a unique generation who are saddled with student loan debt and are constantly forced to balance paying down debt vs. saving for the future.  According to a recent survey by the National Institute on Retirement Security, 66% of Millennials have nothing saved for retirement.4 That’s a huge problem!  For many, there’s little money left to save after paying monthly living expenses and paying down student debt, which in many cases is more than your average car payment.  Outstanding student loan balances rose to a record $1.53 trillion as of June 2018, which accounts for the largest segment of consumer non-housing loan balances followed by auto loans and then credit cards5.  Millennials are financially stressed, which leads to reduced productivity at work.  It also leads to health-related issues and employees delaying retirement, which cause health care benefit plan costs to rise.

One Company’s Strategy

A company recently came up with a creative program to address these issues and help employees pay down their student loans while also saving for retirement.  They structured it fairly so that it benefits both employees paying down student loans and those without them. For employees that participate in the student loan repayment program, the company will make a contribution equal to 5% of compensation into their 401(k) plan account if the employee makes student loan repayments of at least 2% of compensation.  For employees who don’t participate in the student loan repayment program, the company will make a matching contribution equal to 5% of compensation into their 401(k) plan account if the employee makes 401(k) contributions of at least 2% of compensation.6  The interesting thing about this structure is the employer gets the tax-favored treatment of their contribution since it goes into the company 401(k) plan rather than directly to pay down the employee’s outstanding student loan where they would not get the tax-favored treatment.  There is legislation in Congress to extend tax-favored treatment to student loan repayment programs, but nothing has been passed yet.

This program was approved in a private letter ruling from the IRS in August 2018.  The ruling applies only to this one company requesting the approval.  However, it paves the way for future legislation that could be made available to the masses.  There has been no precedent for this structure of a student loan repayment program prior, which is why the employer went through a costly process to obtain the private letter ruling from the IRS.  They mainly wanted to confirm the program wasn’t in violation of the Contingent Benefit Rule, which states a 401(k) plan cannot condition any other benefit on participation in the 401(k) plan.  The IRS ruling confirms this design doesn’t violate that rule since the company contribution was contingent on the employee making student loan repayments.

Stay tuned for more updates on this topic as it continues to garner interest.

Sources:

1Franck, Thomas. “More than a Third of Small Businesses Can't Fill Open Jobs, Matching a Record.” CNBC, CNBC, 10 July 2018, www.cnbc.com/2018/07/10/more-than-a-third-of-small-businesses-cant-fill-open-jobs-a-record.html.

2Helhoski, Anna. “Companies That Offer Employer Student Loan Repayment.” NerdWallet, NerdWallet, 3 July 2018, www.nerdwallet.com/blog/loans/student-loans/employer-student-loan-repayment/.

3Hirsch, Arlene S. “Employers Explore Repaying Student Loan Debt.” SHRM, SHRM, 2 Aug. 2018, www.shrm.org/resourcesandtools/hr-topics/benefits/pages/employers-explore-repaying-student-loan-debt.aspx.

4Brown, Jennifer. “New Research Finds 95 Percent of Millennials Not Saving Adequately For Retirement.” National Institute on Retirement Security, National Institute on Retirement Security, 27 Feb. 2018, www.nirsonline.org/2018/02/new-research-finds-95-percent-of-millennials-not-saving-adequately-for-retirement/.

5“Board of Governors of the Federal Reserve System.” The Fed - Consumer Credit - G.19, Board of Governors of the Federal Reserve System, 5 Oct. 2018, www.federalreserve.gov/releases/g19/current/default.htm.

6Levine, Jason E. “Private Letter Ruling - Student Loan Repayment.” Received by Taxpayer, IRS Private Letter Ruling, IRS, 17 Aug. 2018, www.irs.gov/pub/irs-wd/201833012.pdf.