A recent IRS ruling opens the starting gate for companies to help employees pay off student loans while also saving for retirement.
While a growing number of companies have begun to provide student loan repayment as an employee benefit, that assistance is still considered taxable income as of now.
Recently, the IRS ruled that an employer can also put matching dollars into your 401(k) retirement account — even if you’re diverting money from your paycheck into student loans rather than your 401(k).
This is good news for student loan borrowers who want to begin saving for retirement. A recent study by researchers at the Center for Retirement Research at Boston College found that by age 30, college graduates with student loan debt had saved half as much for retirement as graduates who were free of that burden.
Student loan repayment assistance through a 401(k)
Here’s how the newly established method for 401(k) matching works. Let's say your employer requires that you allocate 2% of your monthly pay to your 401(k) in order to claim the 5% company match. Companies that want to provide support to student borrowers through a 401(k) plan can count your monthly student loan payment as fulfilling the requirement to receive matching funds, according to the IRS.
So for this example, if you are paying at least 2 percent of your paycheck each month to your student loan, you would be eligible to receive your company’s 401(k) match — saving for retirement without ever allocating any of your paycheck to your 401(k).
Ruling could be used to design different programs
At the company who requested approval for this from the IRS, “the student loan repayment benefit effectively replaces the employer matching contribution for an employee who chooses to participate in the program,” Holdvogt and Engle note. “An employee who signs up for the program is not eligible to receive regular matching contributions under the plan while the employee is participating in the student loan repayment program.”
So the value of this kind of program “is really directed at employees who are paying off student loans and who otherwise are not making 401(k) or other employer contributions,” said Holdvogt, a partner at McDermott Will & Emery LLP.
However, Holdvogt noted that “the principles described by the IRS in the private letter ruling could be applied to other employer designs that provide different benefits.”
For instance, an employer could add a program that provides student loan repayment contributions “that are in addition to a matching contribution, rather than one that effectively replaces an employer’s matching contribution,” Holdvogt said.
“Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, the (IRS private letter ruling) will very likely cause many employers, particularly employers with a young and educated workforce, to consider offering a student loan benefit as part of their retirement program,” Holdvogt and Engle conclude.