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Home Blog The IRS Ruling, 401(k) and Student Loan Repayment: Here’s What You Need to Know

The IRS Ruling, 401(k) and Student Loan Repayment: Here’s What You Need to Know

The IRS Private letter Ruling, 401(k) and Student Loan Repayment: Here’s What You Need to Know

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 Forbes, 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.

How does this 401(k)/Student Loan Repayment Benefit Work?

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.

Qualifying for Student Loan Repayment with a 401(k) Match

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.

What other Types of Benefits Exist?

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!

DISCLAIMER: The information contained on this web site is provided for general informational and educational purposes and is not, nor intended to be, legal, financial or tax advice. The publisher is not authorized to practice in front of the IRS and is not subject to IRS Circular 230. This information is general in nature and may not apply to the specific circumstances of individual readers. No claims are made about the accuracy, timeliness or usefulness of the content contained on this web site or any site linked to this site. Users of this site should seek specific guidance directly from a qualified legal, financial or tax professional. Nothing contained on or provided through this site is intended to be or is to be used as a substitute for professional advice.

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