One of the most prevalent and difficult challenges for many twenty somethings these days is the repayment of their, often substantial, student loan debt. Statistics show that the average college graduate with a bachelor’s degree left school in 2016 with $28,446 in student loan debt. While paying off this mountain of debt is certainly a difficult task on its own, doing so and contributing toward retirement can be a seemingly insurmountable challenge. But, there’s hope. A recent private letter ruling made public by the IRS in August takes aim at alleviating some of this burden for the participant while doubling as an added tax benefit to the plan sponsor.
In August, the IRS issued the private letter ruling to Abbott Laboratories which allowed its employees, who qualified for the company’s 401(k) Plan, to receive a full matching contribution if they were to contribute at least 2% of their pay toward reducing their student loan debt. The IRS ruled that the contributions would be allowed even if the employees weren’t contributing any portion of their pay to the plan. Abbott stated that the change to the plan responds to the financial challenges facing their young employees. The change gives free retirement money for the student loan borrower and a tax benefit for the employer.
While this is fantastic news for employees that can’t afford to contribute because of student loan debt, the lingering question is “Is it legal?”. After all, a private ruling does not constitute tax law and, at the moment, the letter only applies to one Chicago company. However, Abbott isn’t the only employer to adopt this type of program. Financial giant, Prudential Retirement, started offering a similar program in 2016. Until the IRS issue expands guidance, employers wishing to implement student-aid based contributions should contact their TPA or legal counsel to understand any potential liability.
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