Student loan debt can be a significant deterrent to many of your employees’ retirement savings efforts — not to mention an anxiety-inducing drag on their productivity. Combining student debt payment support with your 401(k) plan is a tricky business. But one employer managed to navigate ERISA restrictions to combine tuition repayment and 401(k) plan benefits in a way that passed muster with the IRS. In a recent private letter ruling (PLR), the IRS gave its approval to an employer (later identified as Abbott Laboratories) whose plan was subsequently rolled out to employees.

Harsh Reality

Aggregate student loan debt, weighing in at about $1.5 trillion, exceeds that of credit cards and auto loans, according to a recent compilation of data by Forbes. Around 44 million Americans have outstanding student loans. Average student debt is in the $30,000 range, which can translate into monthly payments of around $333 over a 10-year period, according to

Those dollars might otherwise find their way into your 401(k) plan. And, chances are, the more highly educated — and valuable to you — your younger employees are, the higher their debt burdens.

What, if anything, can you do about it? One approach is educating employees about loan repayment strategies and debt forgiveness programs (or leading them to experts who can provide such guidance).

Another is student loan repayment benefit programs, which have been adopted by a few high-profile employers such as Fidelity Investments and PwC. But this strategy isn’t likely to take the country by storm. For one, program benefits are taxable to employees. Second, the strategy requires a thoughtful communication campaign to avoid stirring resentment among employees without student debt who can’t participate. Third, student loan repayment benefit programs aren’t linked to employees’ retirement plan contributions.

ERISA Contingent Benefit Rule

The principal obstacle to combining student debt payment with a 401(k) plan is ERISA’s “contingent benefit” rule. It states that employers can’t make employees’ receipt of “other benefits” contingent on their making contributions to a 401(k) plan.

“Other benefits” include health, dental, and life insurance. It also includes stock options and most other forms of compensation, including employer contributions to employees’ 401(k) plan accounts.

“Freedom 2 Save” Program

Strictly speaking, PLRs don’t carry the weight of a Revenue Ruling. In fact, the PLR in question specifically states that the “ruling is directed only to the taxpayer requesting it,” and that it can’t be used or cited as precedent. But creating a plan that mimics one approved in a PLR should put you on safer regulatory ground than you otherwise would be.

Under Abbott’s 401(k) plan, participants who contribute at least 2% of their compensation to their accounts receive a matching contribution equal to 5% of their compensation. However, there’s a different value proposition for employees in the “Freedom 2 Save” program.

Instead of contributing at least 2% of their compensation to the 401(k) plan, they can make equally large student loan payments — without forfeiting the 5% employer match to their 401(k) plan accounts. But that 5% employer contribution isn’t made until the end of the plan year. If the employee leaves the company before then (unless because of disability), the employer contribution is forfeited.

Abbott’s “Freedom 2 Save” program is voluntary and all employees eligible to participate in the 401(k) plan are eligible to participate in it. Employees must elect to enroll and, once enrolled, may opt out of enrollment on a prospective basis. Participating employees can still make 401(k) plan elective contributions.

If an employee who was participating in the “Freedom 2 Save” program opts during the plan year to stop making student loan repayments and shifts those dollars (at least 2% of eligible compensation) to his or her 401(k) plan account, that employee remains eligible for the 5% employer matching contribution. Even so, that employer match for the year won’t be made until after the end of the plan year, as opposed to every pay period, the way matches are done for employees who don’t participate in “Freedom 2 Save.”

According to the PLR, employer contributions to the 401(k) plan accounts of employees participating in the “Freedom 2 Save” program are subject to applicable plan qualification requirements, including “eligibility, vesting, and distribution rules, contribution limits, and coverage and nondiscrimination testing.” What’s more, an employer offering this benefit couldn’t also offer student loans to employees who are eligible to participate in the program. 

Is It Right for Your Plan?

The PLR doesn’t address every potential compliance issue an employer might face in offering such a program. Given all that’s involved, research employee interest in any such program and consider the increased administrative costs before launching a 401(k)-linked student loan debt relief benefit.

Jenise Gaskin - CPA - Advisory

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