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.

Read more

The Case for Student Loan Benefits Is Much Stronger Than the Case Against

The Case for Student Loan Benefits Is Much Stronger Than the Case Against

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.

Read more

Congress Delays ‘Cadillac Tax’ on Health Plans Until 2022

Congress Delays ‘Cadillac Tax’ on Health Plans Until 2022

One of the most widely disliked provisions of the 2010 Affordable Care Act is the 40 percent excise tax it imposed on health insurance plans costing more than $10,200 for individuals or $27,500 for families. The so-called “Cadillac tax” was originally set to become effective this year, but its implementation date was later pushed back to 2020. A Republican plan to repeal and replace the ACA, which ultimately failed in Congress last year, had proposed to delay the tax until 2025, although employers have been pushing for its total repeal.

The major tax reform bill passed by Congress last month did not touch the Cadillac tax, but a resolution to restore funding to the federal government this week after legislative gridlock led to a government shutdown included a further delay in its implementation, SHRM reports:

Both political parties supported the provision to postpone the so-called Cadillac tax from taking effect until 2022, instead of in 2020—as did the Society for Human Resource Management (SHRM). The stopgap funding bill also amends other tax provisions that were part of the Affordable Care Act, such delaying the medical device tax—a 2.3 percent tax on the sale of certain devices—until 2020. …

Read more

Apple Plans to Invest Repatriated Cash in New Jobs, Capital Improvements

Apple Plans to Invest Repatriated Cash in New Jobs, Capital Improvements

Apple announced on Wednesday that it was bringing hundreds of billions of dollars back to the US that the company had previously held overseas to take advantage of a loophole in the US tax code that has now been closed. In doing so, Bloomberg’s Alex Webb and Mark Gurman report, the company will incur a tax bill of around $38 billion, but it also plans to spend $30 billion over the next five years on capital expenditures, with which it expects to create 20,000 new jobs and open a new campus:

“We are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” Chief Executive Officer Tim Cook said in a statement Wednesday, which also alluded to unspecified plans by the company to accelerate education programs. Apple also told employees Wednesday that it’s issuing stock-based bonuses worth $2,500 each following the new U.S. tax law, according to people familiar with the matter.

These moves came in response to the tax reform package passed by the US Congress in December, which reformed the international tax system for corporations by removing a rule that let American companies defer paying taxes on foreign income until they repatriated those earnings, incentivizing companies to stockpile some $3.1 trillion in cash overseas. Apple was among the companies best known for taking advantage of the deferral provision and faced extensive criticism for doing so, including from President Donald Trump.

Other major US companies, including Walmart, have announced raises, bonuses, and other investments in their workforce in light of the major corporate tax cut enacted last month.

Read more

What Employers Need to Know About the US Tax Reform Act

What Employers Need to Know About the US Tax Reform Act

The “Tax Cuts and Jobs Act,” which officially passed both houses of Congress on Wednesday, will have a significant impact on employers throughout the US, by lowering taxes on corporate profits and most employees’ salaries, as well as by changing the tax treatment of executive compensation and a number of other rewards. Here’s a quick look at how tax reform will affect employers and employees, and what HR leaders need to be thinking about right away:

Corporate Tax Reduced

The act permanently reduces the maximum corporate tax rate to 21 percent from 35 percent starting in 2018, while providing additional avenues for businesses to avoid being taxed at higher rates. It also includes a one-time tax cut for corporations repatriating cash currently held overseas, and introduces a territorial tax system that imposes a 10.5 percent tax on future foreign profits, benefiting American companies that do a lot of business internationally. This change, which the tech sector is cheering, is meant to encourage businesses to reinvest their foreign profits in the US, but others say this approach has long-term costs that outweigh the apparent immediate benefits.

Some companies announced that they were passing a portion of their tax windfall onto their employees, either with across-the-board bonuses or increases in their internal minimum wage. Moves like these will please President Donald Trump and Congressional Republicans, who have long argued that slashing corporate taxes would lead to higher employment and wages. To critics, however, these announcements look more like public relations plays or attempts to curry favor with the administration, while investors, not employees, are expected to see the lion’s share of the gains.

Payroll Scramble

The first thing employers will have to do in the new year in response to these tax changes is to make sure their payroll deductions reflect the new rate and bracket structure, which has been significantly altered. The bill also dispensed with the personal exemption employees are used to using to calculate their taxable income, while roughly doubling the standard deduction. Payroll management companies Paychex and ADP say they expect to make these changes quickly and that employees should start seeing the new rates reflected in their paychecks as early as February. However, the Internal Revenue Service must first produce new withholding tables, which could take more time than usual given the overhaul the bill made to the system of deductions and exemptions. Employers will have to await further guidance on this from the IRS.

Executive Pay

The tax reform bill removes from the tax code a controversial provision introduced in 1993 that capped the tax deductibility of top executives’ compensation at $1 million, unless that compensation was “performance-based.” Originally intended to rein in the explosion of CEO and CFO pay packages, the measure failed to do so, and critics say it actually backfired by encouraging companies to shift executive compensation into stock options and pay for performance. Although it is unclear how the new rule will affect the way top-level executives are paid in the long term, it does give boards some decisions to make right now in order to maximize their tax benefit, such as whether to shift a CEO’s bonus payment from 2018 to 2017 so that it remains tax deductible. For more details, SHRM’s Stephen Miller has a helpful breakdown of the bill’s impact on executive compensation and payroll in general.

Other Employee Benefits

The bill changes the tax treatment of a variety of employee benefits, such as adding a new credit for wages paid to qualifying employees on leave under the Family and Medical Leave Act, but cutting the deduction for commuter benefits. SHRM’s Stephen Miller also provides a comprehensive explanation of these effects here.

Impact on ACA and Health Insurance Market

While Congressional procedure prevented Republicans from using the tax bill to formally repeal the mandate for individual health insurance coverage created under the Affordable Care Act, the bill takes the teeth out of the mandate by zeroing the tax penalty for failing to obtain coverage. This change will have major implications for the individual insurance market, potentially driving up premiums as healthy individuals exit the market, no longer fearing a tax penalty. The bill does not address other aspects of the ACA to which businesses have objected, such as the employer mandate and the so-called “Cadillac tax” on high-value health plans, but has emboldened business groups to push for more changes to these controversial policies in the coming year. As health care policy expert Timothy Jost explains in detail, scuttling the individual mandate will have some consequences for the employer-sponsored insurance market as well.

How the New US Tax Reform Bills Would Affect Employers

How the New US Tax Reform Bills Would Affect Employers

Late last week, Republicans in the US Senate and House of Representatives both passed versions of a comprehensive tax reform bill whose signature feature is a hefty cut in the corporate tax rate, from 35 to 20 percent. The bill, which received no Democratic votes in either house of Congress, now goes to conference, where lawmakers from both chambers will attempt to reconcile the two bills. Significant differences still exist between the two versions, however, and the Senate bill underwent a number of hasty revisions at the last minute before being passed in the middle of Friday night. It is therefore still uncertain whether Republican lawmakers will be able to agree on an identical bill that can pass both the Senate and the House.

Both versions of the bill have major implications for employers, beyond the tax breaks for businesses. Together, the bills touch on health insurance, retirement plans, and other employee benefits, but do so in different ways. SHRM’s Government Affairs team prepared a handy chart comparing the bills’ employer implications side-by-side, while Stephen Miller gives a comprehensive rundown of the differences:

Tuition Benefits: The House bill would eliminate the employer-provided education assistance deduction under Internal Revenue Code Section 127, which allows employers to provide up to $5,250 of tax-free tuition aid to an employee per year at the undergraduate, graduate or certificate level. The Senate version does not eliminate the education assistance deduction. …

Individual Health Coverage: The Senate’s bill would effectively repeal the Affordable Care Act’s (ACA’s) individual mandate, which requires most Americans to have health insurance, by reducing to zero the tax penalty for going without coverage. The House bill leaves the individual mandate in place.…

Read more

New Apprenticeships Decline in England After Levy, Prompting Calls to Drop Target

New Apprenticeships Decline in England After Levy, Prompting Calls to Drop Target

The number of people starting apprenticeships in England declined by 59 percent in the final quarter of the academic year, May–July 2017, to 48,000 from 117,800 in the same quarter of last year, Rob Moss reports at Personnel Today based on new figures from the UK Department for Education. While not unexpected, the decline underlines the rocky start that has befallen the UK government’s controversial apprenticeship levy scheme, which went into effect in April. Both union and industry leaders suggest to Moss that the levy has been making apprenticeships more difficult to organize:

In the lowest level training schemes, intermediate apprenticeships, the number of starts fell by 75%. Tony Burke, assistant general secretary at Unite, said the trade union had concerns about the lowest grade of apprenticeships and whether these were beneficial. He added that there was “a great deal of frustration” with the new scheme. “Some businesses view this as a disaster. The levy has made things more complex so they are not taking apprentices on,” Burke said.

Read more