(7-10 minute read)
Who knew a letter to the Internal Revenue Service (IRS) could potentially change the landscape of employee benefits?
Somewhere among the millions of businesses in the United States is a particularly ingenious manager. This person understood the cost of turnover and the importance of retaining good employees. They also knew that student loan debt has tripled over the last decade. Realizing that younger employees were attempting to pay off those debts, this manager could see that they were ignoring 401(k) contributions and relinquishing the company match. They were risking their future retirement needs in order to manage their present college loan payments.
This manager was right. Americans currently hold $1.4 trillion in student loan debt. This makes up the largest portion of non-housing consumer debt, exceeding auto loans ($1.2 trillion) and consumer credit card debt ($0.8 trillion). Additionally Pew Research found that only 52 percent of millennial employees take part in their 401(k) plan. Their participation rate is lower than any other age group and many experts predict this is due to the burden of student loan debt payments.
Thinking about this dilemma, the manager had an idea and shared it with the IRS. This person and the company have not been identified, but they asked if they could match the student loan payments of their employees up to their established 401(k) percentage, and put the match into a 401(k) account. This creative benefit alternative could help retain younger employees while assisting them with the establishment of retirement savings.
And the IRS said “Yes.”
On August 17, the IRS issued a private letter ruling, stating that the unidentified company could proceed to treat student loan payments in the same way that they would treat 401(k) contributions. (See the private letter ruling for the details.) While this decision only applies to the party who requested the ruling—meaning, it’s not a unilateral decision for all companies—experts believe this will set a precedent allowing all businesses to eventually use this option.
If this is the case, what are the benefits to companies like yours?
First, this new model can help you attract and retain younger employees. Millennials say they are too wrapped up in making student loan payments to even think about 401(k) contributions. Offering this flexibility gives them a lucrative alternative, allowing them to take advantage of your company match and get started on accumulating retirement savings.
Second, this model would not require setting up and administering a new benefit plan. According to the IRS, it’s just an amendment to the company’s current 401(k) plan as long as it is handled according to the agency’s specifications.
Third, offering this benefit would be cost neutral to your company because the company match is an expense whether it matches a student loan payment or a 401(k) contribution.
The extent of the benefit of this plan to your business would depend on the age demographics of your company and on how many of your positions are filled by recent college graduates. Take a look at the participation rate for your 401(k) plan. Are people taking full advantage of their match? Analyze how many people are not participating and see if you can estimate how many of them might be in the age bracket to likely have school loan debt. If the number is significant, the new ruling might be a feasible option for your company.
Stay tuned to see if this IRS ruling will be expanded and made available all companies. If so, it will be a win-win benefiting both your company and your employees. If not, but you like the idea, follow the example of this mystery manager. Write to the IRS.
November 15, 2018
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