Posted by Tyler Starr, CPA
The IRS issued a private ruling on August 17, 2018, to allow an unnamed company to implement a new type of benefit for employees with student loan debt who were eligible to participate in its 401(k) plan. Prior to the private ruling, the company offered a 5% match contribution if employees contributed at least 2% of their income to their employer-sponsored retirement account. The company proposed to amend the plan to also allow student loan repayments to qualify for matching contributions. Under the new amendment, as long as employees can prove that they are paying at least 2% of their salary toward student loan debt, the company will make a 401(k) contribution equal to 5% of their salary to their retirement account, the same amount employees would receive if they were actively contributing 2% of their salary to their 401(k).
At that time, the IRS ruling was only specific to the one company that requested the ruling. Plan sponsors eager to emulate this company consulted their legal counsel, sat back, and patiently waited for the IRS to issue further guidance. On December 18, 2018, another step was taken to allow employer matching contributions for student loan repayments when Senator Ron Wyden introduced a bill to amend the Internal Revenue Code to permit treatment of student loan payments as elective deferrals for purposes of employer matching contributions. The act was titled the “Retirement Parity for Student Loans Act.” The treatment would be a voluntary decision made by plan management. The bill also clarified a concern from the original private ruling that matching on student loan payments would not disqualify a plan for nondiscrimination testing purposes.
To be eligible for the benefit, if elected by the plan sponsor, employees must be eligible to make salary deferral contributions and receive the associated employer matching contributions. The benefit must be made available to all eligible employees. The bill helps workers who cannot afford both, to save for retirement and pay off their student loan debt. As student loan debt continues to rise, this provision could help new graduates be better prepared for retirement while focusing on relieving the stress of student loan debt. The bill specifically identifies qualified student loan payments as repayments of a qualified education loan incurred to pay qualified higher education expenses of the employee.
The voluntary benefit would be available for 401(k), 403(b), and SIMPLE retirement plans. The matching formula for student loan repayments must be the same formula for matching salary reductions, and there are limits on the amount of loan repayments that can be matched. Student loan repayments are only considered to the extent that the employee has not reached the maximum annual contribution limits. Generally, that limit will be $19,000 in 2019, however, an additional $6,000 would be available to those age 50 or over with student loan debt.
The changes from the introduced bill would be effective for plan years beginning after December 31, 2019. While it’s unclear how or when the bill will be passed, the legislation has pushed the conversation on student loan repayment employer matching forward and is something for plan sponsors to monitor. Senator Wyden himself said he introduced the bill in preparation for broader debates around improving retirement policy. The bill doesn’t necessarily alleviate the burden of student loan debt, but the introduced legislation will at least help employees struggling with student loan debt begin to save for the future.