Student Loan Debt Relief

A Private Letter Ruling (PLR) issued by the Internal Revenue Service (IRS) in May has gained much attention from plan sponsors and advisers.

In the private letter ruling, the IRS explained that the company requesting the ruling offers a 401(k) plan under which, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period, the plan sponsor makes a matching contribution on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period. The regular matching contributions are made each payroll period.

The plan sponsor proposed to amend the plan to offer a student loan benefit program, under which it would make an employer non-elective contribution on behalf of an employee conditioned on that employee making student loan repayments (SLR non-elective contribution). The program is voluntary—an employee must elect to enroll, and once enrolled, may opt out of enrollment on a prospective basis. If an employee participates in the program, the employee would still be eligible to make elective contributions to the plan but would not be eligible to receive regular matching contributions with respect to those elective contributions.

Such an employee would be eligible to receive SLR non-elective contributions and true-up matching contributions, as appropriate.

The IRS noted that SLR non-elective contributions under the program are conditioned on whether an employee makes a student loan repayment during a pay period and are not conditioned (directly or indirectly) on the employee making elective contributions under a cash or deferred arrangement.

The agency gave its stamp of approval on the plan amendment, saying that because an employee who makes student loan repayments and thereby receives SLR non-elective contributions is still permitted to make elective contributions, the SLR non-elective contribution is not conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. Therefore, the IRS concluded that the proposal to amend the plan to provide SLR non-elective contributions under the program will not violate the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the income tax regulations.

IRS Private Letter Rulings are directed only to the taxpayer requesting it—in this case, Abbott. But, as Chicago-based McDermott Will & Emery Partner Jeffrey Holdvogt says, “The IRS doesn’t tend to give one ruling to one requestor and the opposite ruling to another. There is strong evidence that if an employer tries to do something similar, the IRS is unlikely to take a contrary position.”

Holdvogt says he believes the plan sponsor interest in the PLR stems from employee demand. In fact, when announcing what it calls its Freedom 2 Save program, Steve Fussell, executive vice president, human resources, Abbott, said, “We see our young professionals coming to us with a problem: Student loan debt payments keep them from setting aside the money they’d like to put in savings for retirement. With every decade you wait to start saving for retirement, the amount you need to save roughly doubles.”

Kyle Healy, vice president of corporate development for benefits consulting firm NFP in New York City, says the student loan debt issue and other issues employees have is important for advisers to be aware of. “I don’t know how advisers can deliver on their job of helping a plan sponsor’s employees prepare for retirement without knowing about these other issues,” he states.

Healy adds that Millennials’ top concern is not saving for retirement. Advisers need to understand what is impacting Millennials’ ability to do what they should be doing, which is save for retirement.

Dr. John Karaffa, founder and president of ProSport CPA in Quinton, Virginia, and author of Touchdown Finance: Personal Finance Tips from the Pros, says employers want to see their company 401(k) plans grow, for their employees to feel the employer values them, and to help rid employees of student loan debt. “In my opinion, the more the employer can financially help their employees, the more loyal the employees will be.” For advisers, he says, this helps grow the retirement savings of workers in America, which has the potential to increase investable assets.

Healy adds that the more valuable advisers can become to clients, it helps them retain clients and win additional clients through referrals. “Showing that they are not just in one lane—they’re doing things that separate them from what others are doing—makes advisers thought leaders and a resource clients will go to first,” he says.

How Advisers Can Help

According to Holdvogt, the IRS PLR created a buzz because it was the first time the IRS almost directly gave some sort of blessing for this type of program. That leads many employers to take a look at this and say, “This is not just something we’re hearing, now we have at least some official word from the IRS that this is something employers can do in certain circumstances.” Holdvogt also says no one wants to be the first in the boat—when someone else does it, and the IRS gives its blessing, it drives employer interest in doing something similar.

However, he cautions that while there may be many 401(k) plan sponsors for whom this model would fit, it will not fit for all plans. For example, Holdvogt says, under safe harbor plan rules, if a non-highly compensated employee receives a non-elective contribution but not a 401(m) safe harbor match contribution, it could violate the safe harbor. “Some may disagree and say it might be ok, but personally, I would not advise a safe harbor plan sponsor to do this in the absence of other guidance,” he says.

Likewise, the benefit model used by Abbott may not work for 403(b) plans. Randy Lupi, regional vice president at AXA Advisors in Cleveland, Ohio, points out that many 403(b) plans—especially those not governed by the Employee Retirement Income Security Act (ERISA)—do not offer an employer match contribution. Holdvogt says an analysis of how different 403(b) plan rules would impact offering the student loan repayment benefit within the plan should be done before encouraging plan sponsors to adopt such a model.

There are other ways retirement plan advisers can help with student loan debt. For example, Gradifi’s SLP (Student Loan Paydown) Plan allows employers to make a regular contribution to pay down an employee’s student loan debt. Gradifi Refi gives employees immediate access to student loan refinancing lenders with exclusive offers, at no cost to the employer, to help employees reduce monthly payments and get out of debt faster. BenefitEd has launched Employee Choice, a program allowing employees to split their employer-matched retirement funds to pay down their student loan debt. Healy mentioned SoFi and Peanut Butter as additional student loan repayment benefit providers with which advisers can form relationships and partner.

Then there is education. Advisers can educate employees about refinancing options and any benefit their employers offer. Lupi, whose clients are mostly educators, stresses that there are loan forgiveness programs many employees don’t know how to use.

There is a public-service loan forgiveness program for nonprofit employees, with qualifications based on adjusted gross income versus debt. Lupi says a person and his spouse may use their joint AGI and not qualify, but an adviser can let them know they can file separate income tax returns and, that way, may qualify. For the public-service loan forgiveness program, a person has to make 120 payments—which don’t have to be consecutive—when enrolled in the program correctly, and the remaining loan balance is forgiven tax-free. The difference in a loan forgiveness program for a corporate employee is the payment is usually for 20 to 25 years and the balance that is forgiven is taxable.

Advisers can also help employees know which loans doand do notqualify for loan forgiveness, according to Lupi. Federal loans do, but Perkins loans do not, he says. And, advisers can warn employees that refinancing their student loan with a private bank or other financial institution will disqualify it for a loan forgiveness program.

If a nonprofit employee gets into a loan forgiveness program, he has to stay a nonprofit employee for at least four years, so he is less likely to jump ship and go to the for-profit world—something employers like, Lupi adds. And, when a borrower enrolls in one of the income-driven repayment (IDR) plans and was paying $650 a month, but is now paying $100 a month, he can redirect his savings. “People have said, ‘I thought I couldn’t save for retirement until I got my student loans under control,’” Lupi says.

According to Lupi, when AXA looks at participants in 403(b) or 457 plans who are enrolled in in an IDR program, the average contribution is $7,200 per year, much higher than the national average of around $2,900.

According to Healy, since student loan repayment benefits are still new, it’s hard to measure their impact on retirement plans, but NFP has clients for which it has seen when a student loan refinance, and especially a student loan repayment, benefit is implemented, there has been a bump in retirement plan participation.

The Future for Student Loan Benefits

Concerning the IRS PLR, Holdvogt says it did not provide guidance about how such a benefit would apply to different types of plans and about the technical issues for nondiscrimination testing.

The ERISA Industry Committee (ERIC) has already asked the IRS to issue a revenue ruling that would broaden the reach of the guidance to enable all sponsors of 401(k) plans to make similar contributions.

Holdvogt also points out that lawmakers have introduced legislation that could potentially amend the tax code to directly allow what is described in the PLR.

“Advisers should be aware that a lot of change is coming—potentially more broad-based guidance from the IRS, and potentially legislation. We will see the dam breaking and a lot of employers adopting this benefit. We have not seen the end of this,” he says.

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Art by Doris Liou