In a Private Letter Ruling (PLR) the Internal Revenue Service (IRS) approved a company's amendment to its retirement plan. This amendment allows the company to make 401(K) contributions on behalf of an employee who is actively paying off student loans!
The plan referenced in the PLR above requires an employee that participates to pay at least 2% of their eligible compensation through payroll to directly pay off their student loan debt. If the employee meets the requirements laid out by the company, they will then be eligible to receive the 5% employer matching contribution to their 401K with no requirement to contribute any of their own funds!
Before I go on I just want to discuss what a PLR actually is. A PLR is a written decision by the IRS related to a taxpayer's request for guidance on unusual/complex tax situations that may not be clear or addressed in the Internal Revenue Code (IRC). A PLR is specific and applicable ONLY to the taxpayer and the specific situation addressed by the PLR.
IT IS IMPORTANT TO NOTE THAT A PLR IS NOT LAW AND CAN NOT BE APPLIED TO ANY TAXPAYER BUT THE TAXPAYER AND SPECIFIC SITUATION ADDRESSED IN THE PLR.
So what does this mean for companies now?
Since the situation described above was from a PLR it is not law and companies may not be able to just go implement a similar plan to the one explained in the PLR above. Companies considering offering this benefit should consult legal counsel on the process that they would need to go through so that they do not violate any laws or provisions of their retirement plans.
Even though the situation is not law and most companies probably do not offer this type of plan right now it is an indication on the IRS stance related to this type of plan which could become a law at some point in the future in which case one could expect many more companies to adopt this option into their plans.
Having a plan like this would benefit an employer because it could help attract top college graduates that have little money to spend on retirement savings due to large student loan payments. Since the employee would receive the matching contribution to their 401(K) just by paying off their student loan debt with no required cash contributions to the 401(K) it could be a deciding factor between two companies if everything else were equal.
For any employee with large student loan balances/payments that does not have sufficient money to save for retirement each year would find this benefit extremely valuable as it would get money into their retirement accounts with no additional cash out of their own pocket. As many know the younger that you start saving for retirement the better off you will be as the impact of compounding interest will be much larger significantly increasing the balance of your retirement account later on.
Lets go through a quick example:
Lets say Bill has two Job offers for $50,000 and all benefits are equal except company A offers a matching plan if you pay your student loans and company B does not.
If Bill goes with company A and the matching contribution is 5% he will receive an additional $2,500 in his 401(K) as long as he is paying his student loans! Lets say for our example this is 5 years. If Bill earns an average of 7% interest on these contributions for 5 years he will have a little over $15,000 in his 401(K) after 5 years. The best part is none of the the $15,000 was contributed using his own cash as it all came from the company matching. Now lets assume after the 5 years Bill never contributes to his retirement again and expects to retire in 30 years. Bill would now have around $117,000 in his 401(K) just from the 5 years of matching contributions!
If Bill went with company B and did the exact same thing he would not have anything saved in his retirement account!
As you can see if a company has this benefit it can be very valuable to a new employee that has significant student loan debt! If these types of plans become part of the law in the future it could help reduce the countries student debt issue and give employees retirement a boost at the same time!
The PLR issued related to this situation can be found here: https://www.irs.gov/pub/irs-wd/201833012.pdf
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This post should not be considered tax, legal, accounting or financial advice. Please consult your own adviser.