IRS Endorses Novel 401(K) Program for Student Loan Repayment

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Sep 6, 2018

Last month the IRS issued a private letter ruling (PLR) on a request by an employer to use their 401(K) plan as a sort of a student loan repayment program. From a Forbes report, these are the details:

Here’s a quick (but not complete) summary of the plan proposal. According to the PLR, the taxpayer (who is anonymous in publicly released PLRs) proposed to amend its 401(k) plan to offer a student loan benefit program. Under the proposal, the employer would make nonelective contributions on behalf of the employee, conditioned on the employee making student loan repayments (“SLR nonelective contribution”). The program would be voluntary and after enrolling the employee could opt-out… 

“Under the program, if an employee makes a student loan repayment during a pay period equal to at least 2% of the employee’s eligible compensation for the pay period, then Taxpayer (employer) will make an SLR nonelective contribution as soon as practicable after the end of the year equal to 5% of the employee’s eligible compensation for that pay period.”

So, a couple of thoughts on this proposal:

  1. While this isn’t a perfect or complete solution, it’s something and as employers, we have to help out our employees who come in with life-altering amounts of student loan debt.
  2. Holy crap – this is really great, innovative HR work by some private employer who is really trying to figure this stuff out! I want to meet the HR Leader/Pro who even thought of this.
  3. It’s the chicken or the egg scenario. Do you start your retirement savings or do you first pay down debt? Obviously, this employer believes you need to solve the debt issue first, then go back and focus on the retirement.
For more detail on the program and issues to consider, see “IRS Allows 401(k) Match for Student Loan Repayments” on the SHRM website.

The HR nerd in me loves this stuff!

You had an employer who saw a major pain point with employees and the hiring of potential employees. They started to brainstorm and somehow came up with an idea: What if we encouraged employees to pay down their student loans and still helped them build their their 401(K) retirement fund? And because we are doing it through a qualified plan, the IRS will work with us to make it non-taxable?

Um, what!?!?

99.9999999% of HR pros would give up on this as soon they heard “IRS!” But this employer decided to just ask the IRS the question, and it sounds the IRS was like, “Yeah, this makes total sense, for sure we need a few rules around this, but let’s do it!” The freaking IRS did something that makes sense?!?

So, this is a lesson for me and my HR brothers and sisters. I’m not saying anything is possible, but many things are possible if you keep trying to innovate, try stuff, and just every once in a while be naive or smart enough to just ask the question.

This article is reposted from The Tim Sackett Project.

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