IRS approves employer's 401(k) incentive for student loan payments
- The IRS made public a private letter ruling last Friday in which it allowed an unnamed employer to amend its 401(k) plan to contribute to the retirement accounts of employees making payments on their student loans.
- To participate in the program, employees must make student loan payments of at least 2% of their salary. They do not need to be putting any money away for retirement to qualify for the benefit.
- The money the company will contribute to an employee’s 401(k) will not undergo tax deductions, which distinguishes the measure from other student loan benefit programs. When an employer gives money directly to an employee who uses it to pay student loans, the IRS considers those funds taxable income. But any money the company puts into a 401(k) will have a tax-free status.
Healthcare company Abbott announced in June that it would begin offering this retirement-student loan hybrid benefit. Lawyers at Groom Law Group say they suspect, in fact, that Abbott is the unnamed company from the IRS letter. "The benefit responds to recent financial challenges facing young employees — many of whom have undergraduate and advanced degrees in science, engineering and business fields — and adds to the strong appeal of joining the Abbott family," the company said in a press release.
Abbott is among the first companies to adopt a benefit that encourages graduates to pay their student loan bills by linking that money to extra cash from the company for retirement. Considering the recent research that says employees want more financial wellness initiatives from their employers and the data that reveals young employees are saddled with student debt and have little or nothing saved for retirement, this idea may hit a sweet spot for workers and employers alike.
Direct employer involvement in student loan debt repayment is increasing, too, as more employees begin to demand it. More than three quarters of workers with student loans say they want their employers to offer a repayment benefit and U.S. employees haven't been shy about the fact that they're willing to leave a job for another opportunity boasting better benefits. The issue has attracted legislative attention; a bipartisan Senate bill allowing employers to contribute pre-tax funds directly to student loan repayment still sits in committee.
Even if a company can't afford to pay off its employees' student debt, it has many options to ease the stress financial problems cause. Many employers are investing more in financial wellness programs, responding to a tight job market that allows employees to make such demands. They may not slash employee debt directly, but programs that teach participants how to deal with money also can help with the mental burdens financial problems can cause, which often spill over into the workplace.
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