In a recent Private Letter Ruling (PLR), the IRS has showed strong support to employers looking to strengthen their assistance for younger workers who are unable to contribute to a 401(k) because of student debt concerns. The IRS letter ruling opines that employees who can prove a repayment of student debt equivalent to at least 2% of wages would be eligible to receive a non-elective employer contribution based on the employee’s total student loan repayments (up to 5%). This contribution would be in lieu of the matching contributions that would otherwise be made to the plan had the employee made contributions and would have to be non-discriminatory. Employees would have to elect to participate and this doesn’t preclude participation in the 401(k).
These student loan repayment plans have had little uptake by employers because of uncertainty in the guidelines and the interaction with a 401(k). The private letter ruling will likely open up the floodgates for employers with large educated millennial populations, filling an important gap in retirement savings plans. 45 million Americans have $1.5 trillion in student debt, which is a heavy weight on recent entrants to the workforce.
PLRs can only be relied upon by the actual letter recipient; however, it is reasonable that many employers will be adopting a student loan repayment plan with matching plan provisions to align with the subject plan – and employers are already starting to do so. Although, with increased adoption, employers will likely tinker with the repayment amount required and the match formula.
With a tightening labor market, there is little doubt that this will be an important tool to attract and retain employees to the workplace.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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