January 18, 2019

Employers Should Buy Into Student Loan Repayment Programs

by Tal Simon, BakerHostetler

With college tuition rising faster than wages and inflation over the last few decades, student loans now comprise the second-largest consumer debt segment in the country.

Over 44 million borrowers hold a combined $1.5 trillion in student loans, and this number is only projected to grow.1 These loans impact retirement security as borrowers have less disposable income to save, and student loan payments divert money that could otherwise be invested in retirement accounts. It is no surprise, then, that student loan repayment assistance programs, known as SLR programs, are becoming a popular employee benefit used to attract and retain employees.

Companies that offer SLR programs generally provide periodic payments toward the principal balance of an employee’s student loans, up to a predetermined amount. While these SLR programs alleviate the financial burden of monthly student loan payments, SLR programs do not receive tax-favored treatment under the Internal Revenue Code. So, unlike qualified educational assistance programs that allow for an annual exclusion of $5,250 from an employee’s gross income, SLR program payments are taxable to the employee. SLR programs also do little to incentivize retirement savings among workers.

However, a recent private letter ruling, known as a PLR, explores a creative way to structure an SLR program that excludes SLR program payments from the employee’s gross income and incentivizes retirement savings. The PLR analyzes Abbott’s “Freedom to Save Program,” which rewards employees that make qualified student loan payments with a contribution to the employee’s 401(k) account. The structure of the program is unique because it appears to violate the contingent benefit rule of Internal Revenue Code § 401(k)(4)(A), which prohibits qualified retirement plans (such as 401(k) plans) from conditioning a benefit on an employee electing to make or not make elective contributions under the plan.2 The PLR confirms that the program does not violate the contingent benefit rule because Abbott’s contribution to the 401(k) plan is conditioned on the employee making a student loan repayment rather than an elective contribution to his or her 401(k) account.

Although the PLR may not be relied upon by other employers, it explores a way to offer a tax-advantaged SLR program that also promotes retirement security among employees. Employers interested in implementing an arrangement similar to the program should contact their benefits counsel to assist in adopting the feature under their 401(k) plan.

1. The Student Loan Debt Crisis is About to Get Worse. https://www.bloomberg.com/news/articles/2018-10-17/the-student-loan-debt-crisis-is-about-to-get-worse (last visited December 6, 2018).

2. IRC § 401(k)(4)(A); Treas. Reg. 1.401(k)-1(e)(6).