Student Loans & Retirement Plans
We've had a number of clients ask us about student loans and employer sponsored retirement plans. There's a new private letter ruling so we want to use this opportunity to give you some information. First of all, let's talk about the student loan debt issue. There's over $1.5 trillion dollars of student loan debt outstanding with about 44 million Americans. Put another way, about one third of working Americans have some form of student loan debt with an average account balance of about $37,000. In looking at this, it was kind of interesting to me that over 15 million Americans over age 40 have some form of student loan debt and about 3 million Americans over age 60 have some form of student loan debt - so it's a problem.
Let me talk about the private letter ruling that was issued by the IRS. The actual
release of this did not have a company name but many believe this is attributed to Abbott Labs. Abbott Labs calls their retirement and student loan program Freedom 2 Save and what it does is if an employee uses 2% or more of their salary to pay down student loan debt, Abbott Labs will put a 5% contribution into their retirement plan
on behalf of that employee. So why would they do this? One reason is it gives both the employee and employer tax advantage ways to help the employees pay off student loan debt.
If Abbott or a company paid a bonus to an employee to give them money for student loan debt the employee would be taxed on it and the employer would pay FICA, FUCA and SUTA taxes on it. By putting it in the retirement plan, the employee is not taxed on it when it goes in and the employer doesn't pay their employer taxes on it. The other reason I think this Abbot has done this is it allows the folks that have a lot of student loan debt to not fall behind the eight-ball with retirement by paying down student loan debt and not saving for retirement.
So this allows the employer to kind of do both with the help of the company and
I also think in a tight labor market that employers are really looking for ways to attract talent and find unique ways to help employees.
A couple of things to take into consideration is:
Can your record keeper handle this type of program?
Can your payroll system handle this type of program?
If you did this, you need to amend your plan documents to have this provision added to your plan, and then the more cumbersome piece of this is
How do you get information about how much the employee is paying on their student loan debt?
If for example with Abbott, how do you verify that the employee is paying 2% percent of their pay?
What we've started to see happening by companies that are looking for ways to help employees with student loan debt is that they've hired student loan aggregators. These companies can take an employee that has, for example, five different student loans and refinance all of those into one - and pay a lower interest rate.
I actually went back and looked at the interest rates on federal student loan debt here the last several years and depending on what type of degree you were getting the rates range from 4 – 4.5% and in more recent times to over 7% even today for different types of student loans. So if you've got an employee that has a master's degree that may be paying 7% on a loan, by refinancing and maybe paying 4.5% over a ten year period of time, if you took a $37,000 loan you saved that employee $5,000 and increase their monthly take-home pay (or the amount of discretionary funds after the refinancing) by about $43.
So just a couple of things to remember: a private letter ruling is issued specifically to the company that delivered it, so I'd encourage you to talk to your ERISA legal counsel to get their opinion if you're considering adding this kind of benefit.
In recap, as employers struggle to find ways in a tight labor market to attract and retain employees I think you'll see more things like this, but this is kind of an innovative way to help employees with two problems: student loan debt and saving for retirement.