Plan Innovation: Student Loan Debt & Retirement Planning

A white background with a black and white logoStudent loan debt in America now totals more than $1.5 trillion according to the St Louis Federal Reserve.* In addition, the most recent Survey of Household Economics and Decision-Making from the Federal Reserve Board indicates that 42% of Americans who have attended college, and 30% of all adults, have incurred debt to finance a degree.**

In fact, student loan debt is now the second largest consumer debt in the U.S. after mortgages and the amount continues to grow. Unfortunately, a recent study by the Center for Retirement Research at Boston College revealed that college graduates with student debt accumulate 50% less retirement wealth in their 401(k)s by age 30 than those without.

Struggling To Pay & Save
The reality is, for today’s younger workforce, paying off student loan debt often detracts from an employee’s ability to contribute to a retirement plan. It’s a growing issue in the U.S. that has now resulted in some innovative thinking with regards to helping employees meet student loan obligations while saving for retirement.

For example, Abbot Laboratories, an American healthcare company, has launched an innovative employee benefit wherein:

  • If an employee makes student loan payments totaling at least 2% of his or her compensation, then,
  • The company will contribute 5% to that employee’s 401(k) whether the employee contributes to their 401(k) or not.

The Result: By paying down their student loans, the employee has the benefit of the employer contributing towards their retirement.
It’s a win-win for the company as it seeks to retain talent in a competitive marketplace and a win-win for the employee who can make a payment towards student loan debt, while at the same time have the comfort that a portion of their retirement is being funded.

The IRS Response
Importantly, in a private letter ruling the IRS determined that this Abbot Laboratories solution did not violate the provisions of the 401(k) tax code. In essence, the private letter ruling allowed that, under certain circumstances, an employer can link the amount of its 401(k) matching contributions for an employee to the amount of student loan repayments made by the employee. It is important to note that this private letter ruling refers specifically to the Abbot Laboratories situation and does not provide carte blanche guidance for other plans. However, it does provide the opportunity for future retirement plan developments and further discussion along these lines.

The Developments Continue
While not yet widespread, Abbot Laboratories’ creative student loan repayment/retirement plan solution reflects the changing needs of the U.S. workforce and how companies and retirement plan providers continue to evolve to meet these needs. In response to this development, employers and retirement plan industry groups have pushed for legislation that would provide guidance on how employers should structure student loan repayment benefits within retirement plans.

Congress has also taken note. Senator Ron Wyden, member of the Senate Finance Committee, has introduced legislation that would permit 401(k), 403(b) and SIMPLE retirement plans to make matching contributions to employees as if their student loan payments were salary. This proposed Retirement Parity for Student Loans Act, which is included in the broader Retirement Security & Savings Act, would enable employers to voluntarily allow recent higher-education graduates to pay their student loans while receiving employer matching retirement plan contributions. Employers would attribute the student loan payments as salary reduction contributions made to the retirement plan. The proposed legislation states that the rate of matching for student loans and for salary reduction contributions must be the same.

At ABG we strive to stay abreast of important and groundbreaking retirement plan developments. As this student loan repayment benefit issue continues to develop, we will keep you updated. Your local ABG representative is always available for any questions you may have.

* As of February 7, 2019
** Survey as of May 2018