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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.
The pharmaceutical and health care products company Abbott Laboratories rolled out a new benefit last week that is designed to encourage employees to pay down their student debt by helping them save for retirement at the same time. The New York Times’ Ann Carrns noted Abbott’s new benefit in an item discussing the broader trend of student loan assistance benefits:
Under the new Freedom 2 Save program, employees who contribute at least 2 percent of their pay toward their student loans — as verified periodically by an outside contractor — will receive a 5 percent match in their 401(k) retirement savings plan. Abbott offers the same match to employees who contribute at least 2 percent of their pay to their 401(k). So, for instance, if an employee is making $70,000 and uses at least $1,400 to pay down student debt, Abbott will contribute $3,500 to the employee’s 401(k) plan, a spokeswoman said.
That benefit can add up over time. Abbott offered this illustration of the program’s impact: [An employee] who joins Abbott with a salary of $70,000 could accumulate $54,000 in their 401(k) account over 10 years, assuming a 6 percent average annual return and yearly merit increases of 3 percent, without any retirement contribution of their own.
Assistance with student loan repayment remains an uncommon benefit among US employers: Our research at CEB, now Gartner, shows that among organizations that offer education benefits, 90 percent provide tuition assistance, but only 7 percent provide student loan reimbursement. 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. Eleven percent offer a payroll deduction for contributions to tax-advantaged 529 college savings plans, but fewer than 2 percent offer matching contributions to those plans.
Lackluster wage growth remains a weak point in an otherwise strong US economy. Pointing to the latest salary budget survey from WorldatWork, Stephen Miller at SHRM notes that US employers’ budgets for salary increases are expected to grow by about 3 percent on average in 2018, “essentially unchanged from 2017”:
WorldatWork’s findings are in line with other 2018 salary projections. For example, 2018 pay projections were reported last May in Planning Global Compensation Budgets for 2018 by ERI Economic Research Institute, a compensation analytics firm in Irvine, Calif. The firm’s forecast, based on data from over 20,000 companies in its research database and analysis of government statistics, projected that U.S. salary increase budgets will grow by 3.2 percent in 2018, up from a 3.1 percent increase in 2017 and 3.0 percent in 2016.
In fact, salary increases have averaged around 3 percent a year over the past five years, amid low inflation and a reluctance on the part of companies to pass on the cost of higher pay to consumers. At the same time, many companies are rethinking the blanket annual raise as a rewards strategy, preferring to rely more on bonuses, targeted raises, and other incentives to reward high performers.
There is, however one area in which US businesses’ investment in their employees is increasing: namely, retirement savings. Martha White at NBC News highlights new data from Vanguard showing that employers are contributing considerably more to their employees’ 401(k) plans than they were just a few years ago, with the average contribution last year standing at 4.7 percent of employee pay, up nearly a full percentage point from 2015: