IRS Approves Company’s 401(k) Matching Benefit for Student Loan Payments

IRS Approves Company’s 401(k) Matching Benefit for Student Loan Payments

A private letter ruling released on Friday by the US Internal Revenue Service gave the tax authority’s blessing to a benefit program in which an company offers to make contributions to its employees’ 401(k) retirement savings if they put a certain percentage of their salaries toward paying down their student debt. The letter finds that this scheme does not violate the regulatory prohibition on making other benefits contingent on an employee’s participation or non-participation in a 401(k) plan.

The letter explicitly notes that its ruling applies only to this one employer, and written determinations such as this letter cannot be used as precedent under federal law. Nonetheless, one expert tells Employee Benefit News that this could pave the way for more employers to offer similar matching programs for student loan payments:

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.” …

“[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.

The organization in question is not identified in the published letter, but the matching program it describes appears identical to the one the pharmaceutical company Abbott Laboratories rolled out in late June. In Abbott’s Freedom 2 Save program, if employees contribute at least 2 percent of their salary toward their student loans in a year, the company will contribute the equivalent of 5 percent of their salary to their 401(k) plan at the end of that year.

Student loan repayment benefits remain relatively rare among US employers: Our research at Gartner shows that among organizations that offer education benefits, 90 percent provide tuition assistance, but only 7 percent provide student loan reimbursement, while SHRM’s 2018 Employee Benefits Survey found that just 4 percent of all organizations offer student debt benefits, compared to 51 percent who offered assistance with undergraduate education.

Adoption rates remain low despite popular demand for this type of benefit and the large number of US adults (especially millennials) struggling with student debt. This may be because employers fear that student loan benefits will be complex and expensive to administer, or because they see it as unfair to offer a benefit only to employees with unpaid student loans and not to their debt-free colleagues. Another hindrance, however, is that these benefits are not tax-favored like 401(k) contributions are (legislation to change the tax treatment of student loan assistance has been stalled in the House Ways and Means Committee since February 2017). Schemes like Abbott’s work around this challenge by offering employees a tax-deductible benefit as an incentive to pay down their debt.