A new ruling from the IRS allows employers to tie 401(k) benefits to student loan payments.
On August 17, the Internal Revenue Service (IRS) told one unnamed employer that they can tie their employees’ 401(k) contributions to their student loan repayment benefits. This decision could pave the way for other employers to follow suit.
As more companies become aware of the student debt problem, many are becoming interested in offering student loan repayment benefits to their employees. Employers realize that offering this benefit is a good way to attract qualified employees and increase employee retention.
After all, data shows that 86 percent of younger employees are willing to stay with a company for up to five years if that employer is willing to help them pay back their student loans. Several well-known companies, like PricewaterhouseCoopers, Fidelity, and Staples, already offer their employees’ student loan repayment plans, according to Bloomberg.
However, they are still in the minority with only 4 percent of all employers offering student loan repayment plans. That could be partially due to the fact that when an employer helps an employee pay down their student loan debt, it’s considered taxable income.
The private letter ruling from the IRS addressed employers that want to offer a student loan repayment option that is connected to their 401(k) plan but is concerned about complying with the law.
In the program described in the IRS’ ruling, if an employee pays at least 2 percent of their annual salary toward their student loan debt, this will count as their 401(k) contribution.
This is good news for borrowers who need to continue making payments on their student loan debt but also want to continue saving for retirement. A study by the Center for Retirement Research at Boston College found that by age 30, college graduates with student loan debt had only saved half as much toward retirement as graduates with no student loan debt.
Prior to the ruling, it was unclear whether employers could offer a tax-free student loan repayment option. This ruling paves the way for employers to tie 401(k) payments and student loan repayment benefits together. And it gives employers the flexibility to design different plans offering student loan repayment benefits.
Attorney Jeffrey Holdvogt told Bloomberg this program offers the most benefit to employees who are paying down their student loan debt but not able to save anything toward retirement. He added that this ruling will likely cause more employers to offer a student loan repayment benefit as part of their retirement program.