We have a student debt crisis in the United States. Student loan debt has quintupled since 2004, bringing the total to over $1.3 trillion. It is second only to mortgage debt.
As a result, many workers are delaying retirement savings. One study found that only one‑third of millennials are contributing to an available 401(k) plan. Who can blame them, when student loan debt is an immediate obligation and other life goals such as buying a home or starting a family are being delayed because of it. Retirement seems far off in the distant future.
But it is not just millennials. Some reports indicate that 35% of student loan debt is held by people over age 39. And many parents have taken out loans of their own to help their children through college.
So what can employers do? Taking a proactive approach to helping employees pay down student debt can attract and retain employees and can further benefit them by allowing them to save more and earlier for retirement. But how?
Here are four programs an employer can implement, from the easiest and perhaps least desirable, to the most complex but perhaps most attractive.
Provide financial education and planning services.
Armed with a basic understanding of math, most people can see that saving early for retirement is a good thing. Some come to this understanding only after seeing the magic of compound interest in the classic example of Person A starting early and winding up with significantly more at retirement age than Person B, who invests more but starts later. However, even if you understand it in theory, how do you squeeze enough out of a debt‑heavy budget to invest?
A good financial education and planning program can help employees optimize their personal financial situation. These programs are usually not expensive for the employer. But to have even a marginal impact, you need motivated and engaged employees. Many employees will not see this as a significant enough benefit for recruiting and retention purposes.
Make loan payments for employees.
Some employers offer employees bonuses and other payments specifically for student loan debt. These payments can be used in strategic ways. For example, loan repayments in the form of:
- Sign‑on bonuses to attract talented employees
- Performance-based bonuses
- Bonuses for reaching service milestones, which effectively work as a retention tool
These payments are taxable to the employee and currently give no special tax benefit to the employer. Several bills have been introduced in Congress to provide tax incentives, but have not seen much traction yet.
Programs like these would be relatively easy to implement, but employers should run them by benefits counsel to make sure they do not run afoul of any tax code requirements, such as the Code Section 409A rules on deferred compensation.
Allow employees to “purchase” repayments with flex spending dollars under a cafeteria plan.
Some welfare plans have a “flex” dollar design, where employees can elect to “spend” their flex dollars on health care and other welfare benefits and cash out unused flex dollars. As an alternative to a cash‑out, the program can be structured to allow unused flex dollars to be used to repay student loans.
This benefit would be after‑tax, but may still be an attractive option for some employees, who may make different choices regarding their health and welfare options if they can have dollars left over to use toward their student loan repayments. The program can require that an employee elect at least one medical program benefit, ensuring employees do not forego medical coverage to repay loans.
Employers will want to check with benefits counsel on any kind of program like this to make sure it meets Affordable Care Act, nondiscrimination, and other requirements.
Make nonelective contributions to 401(k) plans when employees make loan repayments.
While this is a great benefit to employees with student loan debt, many employers cannot afford to make an additional contribution to their plan, and some may even feel it is unfair to allow employees to receive both types of contributions, while employees without student debt are only receiving the 401(k) match.
Last fall, the IRS issued a Private Letter Ruling to an employer offering a different type of plan design. The employer, Abbott Laboratories, offered a 5% 401(k) match to employees making elective deferrals of at least 2% of compensation. The proposal to the IRS was that employees could enroll in a student loan repayment (SLR) program and the employer would make a 5% nonelective contribution to the plan (SLR Match) if the employee made a student loan repayment equal to at least 2% of compensation. An employee could also make elective deferrals to the plan, but they could not receive the match on those deferrals and also the SLR Match.
The IRS said this arrangement would be acceptable, with some caveats. Although a Private Letter Ruling only applies to the employer asking for the ruling, it is a good indication of how the IRS would view this design and offers other employers the opportunity to consider similar programs. There is more to this option, so please contact your Warner attorney with questions.
This ruling is welcome news for employers looking for an approach to helping employees repay student loan debt. A program like this would require review by benefits counsel as well as preparation of the necessary plan documentation. It also adds some complexities for plan testing and administering the program.
Any of these approaches could be a win-win both helping the employee to pay his or her student debt and giving the employer an edge in attracting and retaining great employees in this age of overwhelming student loan debt. Please contact your Warner Employee Benefits attorney to discuss further.