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Crisis Averted? Plan Sponsors Aid with Student Loan Debt
By: Jonathan Joseph, Consultant
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| As many as 44.7 million Americans carry student loan debt, according to a 2018 report by the Federal Reserve Bank of New York. And, that year, student loan debt in the United States totaled $1.47 trillion - more than credit cards ($436 billion) or auto loans ($1.3 trillion)1,2.
With the mounting debt, workers of all ages have been faced with the dilemma of either paying down their student loan debt or allocating some income to their 401(k) retirement savings.
Unfortunately, most Americans do not earn enough to do both. To help bridge the gap, plan sponsors may be able to provide some assistance.
There has been a shift in attitude, over the past five years, around corporations’ responsibility to aid employees saddled with student debt while trying to save for retirement.
Historically, there have been tight restrictions on whether plan sponsors could match employees’ outside bill payments (i.e. mortgage, student loan) with contributions to their 401(k). However, a decision by the IRS last year has accelerated the move to ease the restrictions.
In August 2018, Chicagoland-based Abbott Laboratories received approval from the IRS to allow employees who direct a certain amount of their pay toward the repayment of their student loan receive a five percent contribution from their employer to their 401(k); even if the employee doesn’t contribute to the retirement plan3.
Although the IRS decision signals progress, the practice has not been implemented across the board. The IRS’s ruling was considered an individual case, only applicable to Abbott Laboratories. The ERISA Industry Committee, an employee benefit policy group that lobbies on the behalf of America’s largest employers, wants the IRS to issue a rulemaking the guidance generally applicable, and encourage more employers to implement similar programs4.
In March, The Travelers Companies, Inc. announced it would implement a program similar to Abbott Laboratories’ in 2020, even though it had not received IRS approval. Travelers plan will match employees’ student loan payments, up to five percent of their salary, or $6,500 annually; directing it to their 401(k). And, like Abbott Laboratories, Traveler’s will contribute to the employee’s 401(k) regardless if the employee does5.
Retirement industry insiders saw this to be a sign of the imminent loosening of restrictions around employee student loan repayments matched by employer contributions to employees’ 401(k) plans.
Two months later, in May, when the Retirement Security and Savings Act of 2019 was brought to the Senate floor, they proved to be correct. The proposed bill included a student loan repayment plan provision that would effectively apply universal approval to the practice that has been gaining traction on a one-off basis, requiring individual private-letter rulings from the IRS6.
While the topic issue has gained traction over the past year, the bill is still a long way from becoming law. Other retirement bills, with broad bipartisan support, have begun moving through both the House of Representatives and the Senate.
That does not mean the issue should be cast aside. Plan sponsors need to consult with their recordkeeper, as well as their investment consultant to ensure they’re ahead of any pending legislation when provisions are deemed generally acceptable by the IRS or written into law.
As more employees enter the workforce and face the issue of student loan repayment versus saving for retirement, these programs will become an employer-sponsored benefit to help them attract and retain top talent.
From one company’s plan to another, there will be variations including costs, matching formulas and vesting terms. These conversations should be taking place now, because decision makers will need to carefully weigh the financial implications to come to a consensus as to what works best for their company and their Plan.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate.Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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