Need for Loan Repayment Assistance
What You Should Know
- Student loan 401(k) matching enables plan sponsors to match an employee’s student loan repayment and apply it to their 401(k) account. These programs seek to remove the either/or scenario for employees with student debt and encourage early career retirement saving.
- Employers who are thinking about incorporating a tax-advantaged student loan repayment benefits program may be able to do so within their 401(k) plan. In 2018, the IRS issued a private letter ruling (PLR) permitting Abbot Laboratories to match student loan payments with 401(k) contributions. Other plan sponsors have since obtained similar PLRs allowing student loan assistance in their plans. A PLR from the IRS applies only to a specific plan sponsor proposing to include a student loan repayment benefit program in their retirement plan. Any in-plan student loan repayment benefit program should be reviewed with legal counsel before implementation.
- Legislation has been proposed in the House and Senate that would permit broad adoption of student loan 401(k) matching programs.
- Additional options for employer assisted programs include:
- Providing supplementary compensation based on the size of the student debt
- Assisting employees in refinancing loans at lower rates and fees
- Making payments directly to a loan servicer on behalf of employees
- Offering debt counseling and debt negotiation services
- Providing bonuses that can be used toward paying student loans
Considerations and Challenges
General employer student loan repayment assistance plans
- The appropriate alternative will depend in part on the types of employees an employer seeks to attract and retain.
- Employers must assess whether a vendor will be needed to administer the program and, if so, whether a current vendor or a new vendor is needed.
- Tax consequences for employer and employee must be considered when deciding whether to offer a student loan repayment benefit program that is tied to a qualified retirement plan or works outside of a qualified plan.
Employer assistance programs linking 401(k) plans with student loans
- Employers or their vendors must monitor participation in the student loan program and the DC plan; an employee may start or stop payments and contributions throughout the year. Plan sponsors must have the flexibility to adjust based upon changes in participant behavior.
- Employers will need to compare the level of student loan payments to the compensation earned during the period the payments were made. Integration with a third party is likely to be necessary.
- Nondiscrimination test results may be adversely affected. Safe harbor contributions cannot be made at a higher rate for highly compensated employees than for non-highly compensated employees.
Student Loan Assistance Vendors
*PNC does not endorse third party vendors. Information about third party vendors is provided for informational purposes only. Such information is not guaranteed to be accurate or complete.