Structuring a 401(k) Match Based on Employee Student Loan Repayments

Employers face a constant struggle to attract and retain quality employees.  This is especially true in a strong economy where jobs are plentiful and the demand for well-qualified workers is high.  Historically, employer contributions to 401(k) plans have been viewed as an effective and efficient recruitment and retention tool.  Unfortunately, many employers are finding this inadequate in today’s market because some employees, especially younger employees, prioritize other financial needs ahead of saving for retirement.  For many young employees, student loan debt is a particular concern.

The situation involving student loan debt in the United States is often described as a crisis and it’s difficult to dispute that characterization.  According to a recent article, there are approximately 44 million borrowers who owe about 1.5 trillion dollars in student loan debt as of early 2019.  Student loan debt is the second largest class of debt in the United States, trailing only mortgages and leading both credit card debt and automobile loans.  Recent college graduates are particularly hard hit; the class of 2017 each owed, on average, $28,150.

Some employers are pursuing innovative strategies to incentivize employees to pay down student loan debt while still saving for retirement.  In at least one case, an employer adopted such a strategy and obtained formal IRS approval.

In Private Letter Ruling 201833012, the IRS approved a plan design proposed by Abbott Laboratories[1] in which it made an employer contribution into its 401(k) plan based on the amount each employee paid toward his or her student loan debt.  Specifically, the company deposited 5% of compensation into the plan on behalf of each employee that used at least 2% of his or her compensation for student loan repayment.  Participation in the program was entirely voluntary, the contribution offered with respect to student loan repayment mirrored the match offered to employees making deferrals into the 401(k) plan and the employer did not extend the student loans in question.

Programs such as this have been discussed for some time but have been viewed with much uncertainty and skepticism by many in the industry.  Significantly, the IRS directly addressed one oft-cited technical issue. The IRS ruled Abbott’s program did not violate the “contingent benefit” rule, which generally prohibits employers from making non-401(k) benefits contingent upon participation in a 401(k) plan.  This had been a major concern for many practitioners. Unfortunately, other issues remain.  The Abbot plan was not a safe harbor and it’s unclear if such a program would be viable within a safe harbor plan.  Another potential trouble spot involves nondiscrimination testing because the program likely redirects money from deferrals to student loan repayments.

The issuance of PLR 201833012 is a good indicator that this type of programs are becoming more mainstream and acceptable to IRS.  However, it cannot be viewed as a blanket authorization to adopt such a program because a private letter ruling may only be relied upon by the taxpayer that requested it.

As always, it’s important to carefully consider any changes and discuss the potential benefits and risks with your plan’s advisor.

[1] The identity of those requesting a PLR is generally not public information.  Here, Abbot was identified in several articles discussing the PLR and has confirmed it was the company that obtained the ruling.
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