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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.
A recent analysis by the American Association of University Women found that a sizable majority of all student debt in the US is owed by women—$890 billion out of $1.4 trillion—while individual women with bachelor’s degrees graduate with an average debt $2,700 greater than that of their male classmates:
The newly-released data from the 2015-16 National Postsecondary Student Aid Study also reveal that:
- Women comprise 56 percent of enrolled college students, but hold 65 percent of outstanding student loan debt;
- 71 percent of women have student loan debt at bachelor’s graduation compared to 66 percent of men; and
- Black women graduate with the most debt – at $30,400 – compared to $22,000 for white women and $19,500 for white men. …
The analysis shows how the burdens become compounded by other financial factors – where women take two years longer than men to repay their student loans, in part because of the gender pay gap. Women with college degrees who work full time make, on average, 26 percent less than their male peers, which leaves women with less income to devote to debt repayment. Compared to white men with bachelor’s degrees, black and Hispanic women with bachelor’s degrees make 37 percent and 34 percent less (respectively) and struggle to repay their loans as a result.
The Millennial generation is already known to be struggling with an unprecedented burden of student debt, driven by the rising cost of college, the financial impact of the Great Recession, and other factors. The AAUW analysis adds a new dimension to this problem by illustrating how acutely it affects women (particularly women of color), in combination with the other factors that contribute to their disproportionate levels of financial insecurity.
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.
In a recent post at the Atlantic, Amy Merrick cast a skeptic’s eye on the growing trend of student loan assistance benefits among US employers, arguing that these benefits may not be as helpful to employees as they seem. “For one thing,” Merrick notes, “the student-loan industry is notoriously opaque and difficult to deal with”:
By the time college students graduate, they may have accumulated loans from a number of different places. In contrast with credit-card companies, which typically provide in monthly statements what’s called a minimum-payment warning,student-loan servicers don’t have to tell borrowers how long it will take to repay their loans if they contribute only the minimum every month. … Last year, the [US Consumer Financial Protection Bureau] reported complaints from borrowers that student-loan servicers inexplicably returned payments from employers, applied funds to the wrong account, or made other servicing errors that took months or even years to resolve. In some cases, the benefit affected people’s eligibility for loan-forgiveness programs.
She also points out that student loan assistance is not tax-advantaged in the same way a 401(k) plan or a health savings account is. These payments are treated as regular wages for tax purposes, so employees have to pay income tax on them even as they go directly toward paying off their student debt. A bill that would introduce more favorable tax treatment for student loan benefits was introduced in the House of Representatives in February 2017 but has been stalled in the House Ways and Means Committee ever since and was not addressed in the tax reform package Congress passed last December.
Merrick leverages these points to question whether student debt benefits are really any more valuable to employees than a raise. There are obviously issues to be worked out in the implementation of these relatively new benefits, and of course Congressional action to improve their tax treatment would make them more valuable, but to dismiss them outright at this early stage is premature. For all the media attention they get, student loan benefits remain comparably rare: According to our forthcoming analysis of education benefits at CEB, now Gartner, just 7 percent of organizations offer them. Akhil Nigam, the head of emerging products for Fidelity’s workplace-investing division, tells Merrick that up to 90 percent of the employee student loan payments they process have no issues: Not a perfect track record, but hardly sufficient cause to throw out the baby with the bathwater.
CommonBond, a financial technology company specializing in student loan refinancing and consolidation, recently surveyed 1,500 employees and 500 HR executives across the US to see how student loan debt assistance fits into employers’ financial wellbeing strategies and how well these programs were really meeting the needs of employees. The results of the survey indicate that student debt has a significant impact on the entire American workforce—not just millennials—and that organizations could make a big difference to their employees’ financial health by focusing financial wellness benefits on this form of debt.
Needless to say, CommonBond has a business interest in reaching that conclusion, but its findings happen to dovetail with what we already know from previous studies and our ongoing research at CEB, now Gartner, on global trends in education benefits.
Perhaps the most important of CommonBond’s findings is that 78 percent of employees who currently have or expect to accrue student loan debt want their employer to offer a student debt repayment benefit, including 65 percent of employees in this category over the age of 55. Among employees with student debt, repayment assistance is the most commonly requested financial wellness benefit, CommonBond found, yet HR leaders rank it as their third priority.
In our most recent survey of over 6,000 employees across the globe, we also found that employees value these benefits highly: 61 percent of employees see education benefits as an important factor in making a decision about a job offer. Of the organizations that offer education benefits, 90 percent provide tuition assistance—which has proven hugely successful at organizations from Cigna to Chipotle—but only 7 percent provide student loan reimbursement.
(CEB Total Rewards Leadership Council members should stay tuned, as more insights on education benefits from our annual benefits communication survey will be released next month.)
New York Life Insurance Building (John Mitchell/Flickr/CC
New York Life announced a new student loan assistance benefit for its 12,000 employees this week, which will enable employees with student debt of their own to receive up to $10,200 in aid over five years, as well as student debt advice and online financial planning tools, while those who took out loans for their children will also have access to counseling and other resources, Amanda Eisenberg reports at Employee Benefit News:
Eligible employees will be able to access this benefit — which is administered by provider Student Loan Genius — upon employment, the company says. It also will expand on its current assistance offerings, such as a tuition reimbursement program and the New York Life Family Scholars Program, which assists the children of employees and agents who plan to attend college or vocational school.
Student loan assistance is an increasingly in-demand benefit, especially among millennial employees. While not as high a priority as other benefits like health insurance and 401(k) matching, employer-provided assistance with student loans can be highly valuable to millennials struggling with heavy college debt burdens: Helping an employee pay down their loans a few years ahead of schedule can save them thousands of dollars in interest payments. That’s why even though just 4 percent of organizations currently offer this benefit, that number is widely expected to grow in the coming year as employers, including public sector employers like the city of Memphis, add them in an effort to attract and retain millennial talent.
On Thursday, the Wisconsin State Assembly was poised to approve a $3 billion tax break to incentivize the Taiwanese multinational Foxconn Technology Group to build a display panel factory in the state. The deal, which still must pass the state Senate, would see the electronics giant invest as much as $10 billion in Wisconsin and hire as many as 13,000 people, but it has proven controversial, with opponents saying it isn’t worth the cost.
Another objection opponents raise is that with an unemployment rate of just 3.1 percent, Wisconsin doesn’t have enough workers to fill thousands of jobs. “Which is why,” Bloomberg View columnist Conor Sen infers, “the Foxconn strategy is really a bet that Wisconsin can recruit workers from other states”:
Illinois’s unemployment rate is 4.7 percent. Ohio’s is 5 percent. So the bet Wisconsin wants to make is that it can recruit a high-profile factory, which will draw in factory workers from other states, and that movement will have a multiplier effect creating even more jobs, leading to even more recruitment of workers from other states.
US states have long used tax and regulatory policies to differentiate themselves and attract business investment and talent—or to attract talent in order to attract businesses. With the US labor market the tightest it has been in a decade, states now face the same challenge as employers, of courting scarce talent by offering the right set of incentives. Sen points to Maine, where local employers and Governor Paul LePage are looking at ways to bring back natives of the state who have moved away: