Employers take different viewpoints when addressing requests of employees for assistance in managing personal financial obligations.
As an example of a very clever (but not original) idea, Abbot Laboratories1 received an OK from the Internal Revenue Services (IRS) in Private Letter Ruling (PLR) 201833012 on the question of an employer’s use of a 401(k) plan as an incentive for employees to reduce their student loan debt. In effect, there is a “twofer” opportunity here. The employee pays down student debt without missing the “free money” from the employer’s contribution.
Abbot Laboratories deserves credit for persistence. The company applied for the student loan benefit program PLR on August 9, 2017, and continued to volley with the IRS in additional correspondence in 2018 (February 22, May 3, and the decision on May 22.) The PLR outlines how the student loan repayments (SLR) work and explains the SLR nonelective contribution employees can receive for making the SLR.
This uncommon yet creative 401(k) plan provision could help reduce anxiety among workers who fret about personal financial obligations to the point of distraction, making them less productive to their employers (see the 2017 EBRI Retirement Confidence Survey, Figure 9). It also may help staunch any loss of talent to competitors.
In contrast to “uncommon,” how is “common” defined in savings plan provisions and designs? According to Figure 7 of How America Saves 2018 by Vanguard, participants in the Vanguard database of 4.6 million records receive employer matches as follows:
- Sixty percent of participants receive a match of 50¢ for each $1 deferred on a 6%-of-pay voluntary contribution.
- Thirty-three percent of participants receive a match of 80 cents for each $1 deferred on a 5%-of-pay voluntary contribution.
While these employer matches certainly are reasonable, competitive, financially predictable, and reflective of most plan designs, they are unlikely to be described as “creative” or “cutting edge.”
It is not a stretch to refer to the employer’s match as uncommon and very generous. The match is 5% if the participant makes a deferred contribution of at least 2% of pay. The employer’s goal is to continue making this employer matching contribution for anyone making a student loan repayment, not as a match but rather as a nonelective contribution. The employer can maintain the same level of benefit without additional cost.
So what does this mean for employees who opt for the SLR program?
- As the program is voluntary, election to participate and make student loan repayments can be revoked at any time by the employee. The employee must provide evidence of payment of at least 2% of pay each pay period to the financial institution holding the employee’s student loan. Otherwise, the employer nonelective contribution is not made.
- In turn, the employer will make a 5% contribution to the employee savings plan account (not to the financial institution holding the student’s debt note), but only if the employee is still employed at the end of the year.
- An employee can continue to make elective deferrals into the plan at the same time that person is making student loan repayments but it's not required. A nonelective contribution will be received only because the employee is making student loan repayments.
- Employees electing to no longer make student loan repayments are eligible to receive matching contributions if they are making elective deferrals.
In the PLR, the employer has also avoided any obstacle of possibly failing any of the complex annual tax-code compliance technical tests. As long as the SLR contribution meets eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing, it is not treated as a matching contribution for purposes of IRC §401(m) testing. The IRS concludes in the PLR that SLR nonelective contributions under the program will not violate the “contingent benefit” prohibition of IRC §401(k)(4)(A) and §1.401(k)-1(e)(6). This means that there is no direct or indirect relationship between the SLR contribution and the employee’s elective contribution.
For a benefit that is likely to gain further traction, there are several considerations for an employer to consider before adding SLRs to the benefit program:
- PLRs are specific to the taxpayer requesting the ruling. The IRS will not guarantee that it will be so magnanimous the next time it has such a request before it.
- The plan will need to be amended and employee education will need to be provided.
- The 401(k) plan recordkeeping system may need to be modified.
- The employer may need to find the evidence that this provision will affect enough employees with student loans to be worth the potential cost of administrative changes on its end.
- The employer will need to set up a protocol to confirm that the financial institution holding the student debt has received the appropriate payments by the employee.
Employers do take the time to carefully analyze solutions for their employees that help employees attain financial wellness. As demonstrated, this employer invested a significant amount of time, design, and implementation, which may result in employee engagement and increased productivity.