Saving for retirement is an important consideration for most Americans. Social Security retirement payments are sometimes not enough to fully fund retirement, so many employers offer retirement plans to their employees. For example, a company might establish a 401(k) then match a certain percentage of deposits made by employees. However, many workers find themselves caught between paying down student loan debt and saving up money for retirement. Creative options for helping employees ease their burden including adding a student-loan benefit program to a company’s 401(k).
IRS Letter
In a request dated August 9, 2017 (the “August Letter”), a taxpayer asked the IRS for approval to amend its 401(k) plan. The taxpayer company hoped to allow employees to address their student loan debt. In its simplest form, the employer would contribute 5% of an employee’s compensation to a retirement plan if that employee paid at least 2% of eligible compensation toward student loans. After exchanging several additional letters, the IRS submitted its final response on May 22, 2018. In that response, the IRS found that the proposal did not violate “contingent benefit” prohibitions contained in section 401(k)(5)(A) and section 1.401(k)-1(e)(6).
At this point, the IRS letter relates to one company’s circumstances and is not intended to set precedent for other employers. However, the letter may add momentum to employers’ efforts to both help employees with student loan repayment and retirement savings.
How Did the Student-Loan Benefit Program Work?
The student loan program described in the August Letter provides that the employee makes payments on his or her student loans and provides proof to the employer. The payments must equal at least 2 percent of his or her salary during the specific time period.
After a 2 percent employee deferral, the employer then matches 5 percent of the employee’s salary. The employer match goes into the worker’s 401(k) account, not to the student loan lender. Employers would make the 5 percent match as long as the worker defers 2 percent of income of their wages to either their student loan debt or their retirement account.
Talk to Us About Your Benefit Plans
The effect of student loans on workers is widespread and potentially devastating. In fact, 44.2 million Americans hold student loan debt that totals $1.52 trillion. Adding a student loan repayment plan to a benefit package also may attract and keep the brightest and best recruits.
At Hall Benefits Law, we work extensively with employers to implement strategically-designed, legally-compliant retirement plans, both before and after such plans are established. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. Though located in Georgia, we assist clients throughout the United States, from New York to Nebraska to Nevada.
Hall Benefits Law, LLC
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