Top employers are increasingly offering a student loan HR benefit. According to SHRM, 4% of companies currently offer some form of student loan monetary benefit, and many more offer non-monetary programs — such as refinancing support or financial counseling — that may be stepping stones to a more robust program.
But until a few weeks ago, there was quite a bit of uncertainty about the interplay between a student loan repayment program and 401(k) contributions. The IRS’s recent private letter ruling has provided some much-needed guidance on this topic.
This article will summarize the current options for student loan HR benefits, give some background on the program from Abbott Laboratories that spurred the private letter ruling that the IRS issues in August, and summarize the main takeaways for any HR departments looking to explore a monetary student loan benefit.
Types of Student Loan Benefits
It’s important to identify exactly what type of student loan benefit program the private letter ruling addressed. There are many types of student loan benefits:
The IRS letter ruling only deals with the last category: benefit programs where an employer makes 401(k) contributions to match an employee’s student loan payments rather than their employees’ own 401(k) contributions. The letter ruling does not address a more traditional matching program where employees are given money directly to pay down their loans.
401(k) Contributions Based on Student Loan Payments
After noticing that their younger employees were not meeting the company’s offered 401(k) match, Abbott Laboratories modified their 401(k) plan to help their younger employees save for retirement. Under Abbott’s usual plan, an employee who contributed 2% of her salary to the company’s 401(k) plan received a 5% matching contribution from the company. Under Abbott’s new program, an equivalent 2% payment towards an employee’s student loans would be sufficient to trigger the company’s 5% contribution towards the 401(k) plan, even if the employee never contributed a dime directly into the 401(k) plan itself.
In other words, employees who were paying off their student loans would receive retirement savings directly from the company as though they had been saving for retirement themselves.
IRS Private Letter Ruling
The IRS’s private letter ruling approved Abbott’s plan. Abbott had been concerned that the IRS would see the student loan contribution as an improper conditional requirement to getting the 5% match. But the IRS said that the program did not run afoul of the “contingent benefit” rules of section 401(k)(4)(A) or section 1.401(k)-1(e)(6). The IRS noted that the program was elective and employees had the option of either not participating or returning to the usual 401(k) contribution to qualify for the 5% match.
The IRS also said that a critical feature of the plan was that Abbott did not extend any student loans directly to employees. The letter ruling implies that any such student loan offering would raise questions about the legality of the plan.
The letter ruling is specific only to Abbott’s program and cannot be cited as precedent if your company wants to move in the direction of a student loan 401(k) benefit. However, the ERISA Industry Committee has requested that the IRS make their ruling broader, allowing more more programs to take advantage.
Starting Your Own Student Loan HR Benefit
The IRS’s private letter ruling may encourage trail-blazing employers to follow in Abbott Laboratories footsteps. However, doing so will require changing your company’s retirement plan and having some amount of risk tolerance for the quickly-changing tax and compliance issues surrounding 401(k)s and student loans.
The Abbott Laboratories private letter ruling is certainly encouraging and provides a useful model for any employers who wish to move in that direction. But it does not yet assure that any similar 401(k) plan will meet IRS approval.