Thursday, November 8, 2018

What’s Happening in the Retirement Market?

Rob Peter to Pay Paul?

Typically this idiom has had a negative connotation, but the Internal Revenue Service’s (IRS) August 17 Private Letter Ruling approving the amendment of Abbott Lab’s 401(k) to include a student loan repayment benefit implies there might be circumstances when it’s not only ok “to take from one source to give to another,” but financially savvy.

The IRS gave its blessing to Abbott Lab’s making non-elective contributions to the 401(k) plan based on an employee’s total student loan repayments made outside the plan. These employer contributions would be in lieu of the matching contributions that would otherwise be made to the plan had the employee made elective contributions. However, the employer may provide a year end true-up match to ensure that if there are pay periods where the employee fails to make student loan repayments, but opts to make elective contributions during the same period, the employee would be eligible to receive a true-up matching contribution.

Because an employee may make elective contributions to the plan in addition to student loan repayments, the IRS concluded the program doesn’t violate the “contingent benefit rule” which would preclude an employer from conditioning other benefits on an employee choosing to make or not make 401(k) contributions. Ultimately, the student loan repayment benefit program is voluntary. It is also subject to coverage and nondiscrimination testing, contribution limits, eligibility, vesting and distribution rules.

IRS Private Letter Rulings are directed only to the taxpayer requesting it. Therefore, the ERISA Industry Committee (ERIC) asked the IRS to issue a revenue ruling that would broaden the reach of this guidance and enable all sponsors to make similar contributions. This is especially appealing to employers looking for ways to accomplish the dual purpose of helping employees manage student loan repayment obligations while saving for retirement.

Why is there a need? Over the last decade, the amount of student loan debt in the U.S. has nearly tripled. Studies show that there are currently 44 million Americans with student loan debt, bringing the total student loan debt obligation in the U.S. to more than $1.3 trillion. Research has shown that student loan debt greatly hinders a worker’s ability to save for retirement. A recent study by the Center for Retirement Research at Boston College found that those with student loans have 50% less saved for retirement than those without student loans.

Employers, especially those looking to attract and retain talented millennials, are looking for ways to provide student loan repayment assistance. Recent surveys have suggested only about four percent of employers currently offer their employees some form of assistance or incentive to repay student loans. As is the case with crafting most attractive benefit programs, cost is a challenge. This solution would be close to cost-neutral since an employer would not incur a separate cost to offer a traditional student loan reimbursement program.

If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at

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