For employees faced with significant student loan debt — and there are a lot of people in that category — the idea of putting aside part of their paycheck to save for retirement has typically been a very distant second priority. But now that could be changing, after a landscape-altering ruling from the Internal Revenue Service.
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· Employees who join the program, and make a student loan payment of at least 2% of compensation for the pay period, will receive a 5% non-elective contribution in the plan.
· Employees who join the program are still allowed to defer money into the plan in the traditional sense, however, they cannot receive an employer contribution on both the student loan piece and the traditional deferral piece.
· Eligibility for the program will be the same as the eligibility requirements of the plan.
· An employee can opt out of the program at any time.
· An employee must be employed on the last day of the plan year to receive the contribution.
· A true up calculation will be done to ensure that the employee receives the appropriate contribution.
It’s a clear win-win solution. Those with student loan debt win by now getting a contribution that they would normally have not received, and employers gain a powerful recruiting tool for the sought-after millennial set.
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Rule obstacles for employers
While the ruling is potentially a game changer, and a clear step in the right direction, there are some obstacles that need to be overcome before this goes mainstream.
Offering a SLR program is not as easy as contacting your recordkeeper and updating your service agreement. First, a private letter ruling is not the same as an IRS ruling. The PLR applies only to the employer who submitted the request to the IRS (hence the private part). While the letter may pave the way for guidance from the IRS, employers wishing to add this feature may need to request their own PLR. This especially the case if your SLR design differs from the provisions provided under the approved PLR, which it most likely would. (Note: it took approximately one year for the IRS to issue this PLR.)
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In addition, employers who use a prototype or volume submitter document may be limited with adding this feature. Quite simply, there is no check box for this option in most provider’s documents, so it would appear at this time that the SLR feature would only be available under an individually designed document. Don’t fret, however, once IRS guidance is issued it is likely that sponsors of prototype and volume submitter documents will add the option to their documents.
The final hurdles this type of program will need to clear are more operational in nature, as recordkeeping this feature could prove to be cumbersome. Some examples:
· Employers will need a way to track and verify student loan payments and confirm that the payments were made.
· If the employer makes a match contribution, payroll systems will need to have way to identify these employees and stop their match.
· Rules governing safe harbor plans could limit an employer’s ability to offer this feature.
· Employers need to confirm with their providers that their systems are set up to track the non-elective contribution and how it will impact their ability to complete all compliance testing.
· Sponsors will need to determine the scope of student loans that would be eligible for their programs. Will they include government loans? Bank loans? Personal and family loans?
While all of these obstacles are easily solved, they are still considerations. Much of the work will fall to recordkeepers, who we expect will begin up update their systems to accommodate this type of feature in the coming months.
In the interim, employers should begin reviewing the cost potential cost of an SLR program. Of course, this highlights one of the major hurdles with this type of program — to model how much this could cost employers will need to know, at least approximately, how much their employees pay in student loans. Employers have compensation information, they have deferral information, but they don’t have student loan information. Ultimately, we believe this will prove to be one of the more challenging aspects of this type of program.
Direct student loan benefits
Direct student loan benefits (where an employer reimburses employee for student loan repayment) are considered taxable income. This ruling represents the first instance in which the IRS has blessed pre-tax benefit tied to student loans. In an indirect sense, this puts student loan repayment assistance on equal footing with tax-free employer-sponsored tuition assistance.
The private letter ruling on the SLR Program is a step in the right direction and we expect that it will be the catalyst for the IRS to issue guidance on the program for all plan sponsors. At this time, however, there are too many unknowns for employers to begin offering this program.
