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401(K) Program – Retirement Plan or Student Loan Repayment Plan? Both!

Aug 30

If you didn’t see this week the IRS ruled on a request by a private employer to use their 401(K) plan to be utilized as a sort of a student loan repayment program. Here are the details:

“Here’s a quick (but not complete) summary of the plan proposal. According to the PLR, the taxpayer (who is anonymous in publicly released PLRs) proposed to amend its 401(k) plan to offer a student loan benefit program. Under the proposal, the employer would make nonelective contributions on behalf of the employee conditioned on the employee making student loan repayments (“SLR nonelective contribution”). The program would be voluntary and after enrolling the employee could opt-out… 

Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then Taxpayer will make an SLR nonelective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period.”

So, a couple of thoughts on this proposal:

  1. While this isn’t a perfect or complete solution, it’s something and as employers, we have to help out our employees who come in with life-altering amounts of student loan debt.
  2. Holy crap – this is really great, innovative HR work by some private employer who is really trying to figure this stuff out! I want to meet the HR Leader/Pro who even thought of this.
  3. It’s the chicken or the egg scenario. Do you start your retirement savings or do you first pay down debt? Obviously, this employer believes you need to solve the debt issue first, then go back and focus on the retirement.

The HR Nerd in me loves this stuff!

You had an employer who saw a major pain point with employees and hiring of potential employees. They started to brainstorm and somehow came up with an idea, what if we gave the employees money into their 401K which then would be used to pay down student loan debt, and because we are doing it through a qualified plan the IRS will work with us to make it non-taxable?

Um, what!?!?

99.9999999% of HR pros would give up on this as soon they heard IRS! But this employer decided to just ask the IRS the question and it sounds like the IRS was like, “Yeah, this makes total sense, for sure we need a few rules around this, but let’s do it!” The freaking IRS did something that makes sense?!?

So, this is a lesson for me and my HR brothers and sisters. I’m not saying anything is possible, but many things are possible if you keep trying to innovate, try stuff, and just every once in a while be naive or smart enough to just ask the question.

Keep HRing out there!

6 Comment to “401(K) Program – Retirement Plan or Student Loan Repayment Plan? Both!”

  1. Perhaps I read the letter wrong, but I thought the 5% match was put into the 401(k) and held for retirement (letter said usual 401(k) vesting, rules apply), not that the match could be used toward the loan repayment.
    If so, the employer is helping on both the loan repayment and retirement savings. An employee is able to make payments to their loan and still have their nest egg grow. Furthermore, they are still able to make additional retirement contributions, but those will not be eligible for the match.

    Aug 31, 2018
  2. I think everyone is making good points. However, at the end of the day the problem of college debt still exists. Not all college debt is from goof offs, think of the medical student who begins their career buried in debt. This “solution” applies to only one case but it does offer some insite as to what the IRS is thinking. They are offering a little help and that help applies to the employee as well as the employer who’s looking for ways to attract top talent. The IRS gives us plenty to complain about so let’s celebrate this little bit while we can.

    Aug 30, 2018
  3. Parker…would you say the same about paid leave? It discriminates against those who do not have children. What about health insurance? It discriminates against the healthy.

    akabruno
    Aug 30, 2018
  4. Well, I think it is a terrible idea, for several reasons. We need to encourage students not to amass giant amounts of student debt as our first effort. This is an incentive to roll up as much debt as possible. It discriminates against those students who are more responsible, who save for college, who don’t spend money indiscriminately, who work during college, who work during the summer (rather than touring Europe). It takes away from retirement savings. And, it perpetuates the myth that everyone should/must attend college. This needs further study before we oooh and aaah about it.

    Parker Davis
    Aug 30, 2018
    • Parker –

      I’m not saying we should encourage kids to gather debt, either, but that’s the reality of the situation we are in. This helps get some people out it, faster. That’s a good thing.

      There’s no magic solution to this, just real life ones. This is a real-life solution.

      T

      Aug 30, 2018
  5. The only concern I have about the chicken-egg scenario is the power of compound interest. The difference between contributing to a 401(k) or Roth IRA at age 25 versus age 35 is startling.

    If employers can help those in debt not only with student loans but contributions to retirement, that would be ideal.

    akabruno
    Aug 30, 2018

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