IRS Clears Path for Student Loan Repayment Tied to 401(k)

An IRS decision allowing an employer to offer a student loan repayment benefit as an element of its retirement plan could open the door to other employers interested in offering similar benefits.

The Internal Revenue Service Aug. 17 gave the go-ahead to an unnamed employer’s plan to tie 401(k) contributions to student loan repayment contributions. The private letter ruling, while not precedential, likely will quell concerns from employers interested in offering a student loan benefit through their 401(k) programs, but worried about complying with the law.

Employers increasingly have been interested in offering student loan aid for workers with debt. Eighty-six percent of young workers would stay with their employer for five years if they helped pay off their student loans, according to a 2017 American Student Assistance survey of 500 people between the ages of 22 and 33.

PricewaterhouseCoopers, Fidelity, Aetna Inc., Staples Inc., and New York Life are among the companies that have adopted a student loan repayment program. But they are still part of a small minority. A mere 4 percent of employers offer a student loan repayment benefit, the Society for Human Resource Management reported in 2017.

Under the program described in the private letter ruling, the employer would make a 401(k) contribution on a worker’s behalf if the worker was making a student loan payment of at least 2 percent of their salary for a given pay period.

The employer contribution would be made regardless of an employee’s contribution to a 401(k).

“The individual for whom this is a real benefit is an employee who wasn’t otherwise making 401(k) contributions,” Jeffrey Holdvogt, a partner with McDermott Will & Emery in Chicago, told Bloomberg Law.

Offering Some Clarity

Other employers who want to offer student loan aid connected with a 401(k) might choose to structure their plan differently, but the IRS letter clarifies that there is a path to provide a tax-free student loan repayment option through a 401(k) contribution, Holdvogt said.

It was unclear for employers prior to the ruling because tax code doesn’t specifically allow employers to provide student loan repayment tax-free like it does for tuition assistance, he said.

“The ruling will be helpful for other companies because we have seen in recent months other employers tying 401(k) and student loan repayments together,” Chatrane Birbal, director of congressional affairs for health and employee benefits policy for SHRM, told Bloomberg Law.

Biotech company Abbot Laboratories and marketing agency Rise Interactive recently announced student loan repayment options similar to the one in the ruling, Birbal said.

SHRM has been a strong advocate for student loan repayment options and is backing a bipartisan bill in Congress that would amend the tax code to include student loan aid under the education assistance umbrella.

The Employer Participation in Student Loan Assistance Act (H.R. 795), which has 127 co-sponsors, was introduced by Illinois Rep. Rodney Davis (R) in February 2017.

SHRM wants the bill to be included in Tax Reform 2.0, Birbal said.