Student loan debt is a reality for millions of Americans. And let’s face it, many of us grapple with the choice of either saving for retirement or paying off our debt, but we’re not always able to do both effectively at the same time. But what if there was a way your employer could help? New guidance from the Internal Revenue Service (IRS) may give you that option.
According to Bloomberg, the IRS made a decision on August 17, 2018 to allow Abbott, a pharmaceutical healthcare company, to tie 401(k) contributions to student loan repayment. The ruling came via a private letter ruling in response to an inquiry from Abbott. Which may help lead the charge for other employers interested in making contributions for their employees. In essence, the ruling allows the Plan’s Taxpayer (employer) to offer a voluntary, student loan benefit if the employee’s student loan payment was at least 2% of their salary for a given pay period.
Traditionally, a company contributes to a 401(k) by offering some sort of matching contribution (typically a percentage), commensurate with what the employee contributes. But if you can’t afford to contribute any of your salary to your 401(k), you can’t leverage this benefit.
Abbott wanted to make a change in the way it offers 401(k) matching to its employees. The company’s plan? If an employee pays at least two percent of their salary for any given pay period toward their student loan debt, the company will make a 401(k) contribution of five percent (of their salary for that pay period) on a worker’s behalf.
Why have they decided to do this? It boils down to tax purposes. Employer student loan repayment benefits don’t necessarily have the same tax benefits for the employee as 401(k) contributions.
Some companies offer student loan repayment reimbursement, but that money is considered part of the employee’s taxable income. Abbott’s method however, allows the company to add 401(k) contributions to an employee’s retirement account (funds which are not considered taxable income at the time of the contribution).
This allows their employees to start saving for retirement and tackle student loan debt simultaneously, without impacting their taxable income.
If you work for a company that is open to hearing about new ways it can support its employees, you may want to provide them with information on the new IRS guidance. This might be a benefit they would like to take advantage of, especially as employers explore additional ways to recruit top talent by offering a competitive edge in their benefits package.
Benefits vary between companies, and are definitely something candidates should consider when reviewing their overall compensation. Your employer’s benefits may have changed since you started. If you don’t know your employer’s policy on employee tuition assistance or student loan repayment benefits, you should set up some time with your Human Resources department!
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