IRS clears way for student loan benefit tied to 401(k)
An IRS decision allowing an unnamed company to offer a student loan repayment benefit as an element of its 401(k) plan could help clear the way for other employers to offer similar benefits.
The agency on Friday allowed an unnamed employer’s plan to tie 401(k) contributions to student loan repayment contributions. The private letter ruling isn’t precedential but will likely allay concerns from employers interested in offering a tax-free student loan benefit through their 401(k) programs in a way that complies with the law. Unlike a direct student loan benefit, which is considered taxable income, the arrangement approved by the IRS in its letter lets companies put equivalent pretax funds into a worker’s 401(k) account.
Historically, many plan sponsors have questioned whether such an approach would be permissible under IRS rules. But, explains Jeffrey Holdvogt, an employee benefits partner with McDermott Will & Emery in Chicago, the ruling confirmed that— under certain circumstances — “employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan.”
Under the program described in the private letter ruling, the employer would make a 401(k) contribution on a worker’s behalf if the worker was making a student loan payment of at least 2% of their salary for a given pay period. The employer contribution would be made regardless of an employee’s contribution to a 401(k).
“[The letter] provides helpful guidance for employers looking for new ways to provide such benefits and, in particular, for employers looking for ways to accomplish the dual purpose of helping employees manage student loan repayment obligations while saving for retirement,” Holdvogt says.
Pharmaceutical company Abbott Laboratories recently announced student loan repayment options similar to the one in the IRS ruling. The company will give a 5% 401(k) match to its employees who contribute at least 2% of their salaries to student loan debt.
A growing number of employers, including Estee Lauder, Pure Insurance and clothing retailer Carhartt, have added student loan perks to their benefits package this year. Still, only 4% of employers currently offer their employees some form of assistance or incentive to repay student loans, according to the Society for Human Resource Management.
The IRS ruling may prompt more companies to follow.
“Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, the private letter ruling will very likely cause many employers, particularly employers with a young and educated workforce, to consider offering a student loan benefit as part of their retirement program,” Holdvogt says.