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New 401(k) benefit can help clients pay off student debt and retire faster

Can clients retire debt and retire wealthy? Advisors should take note of a new employee benefit program that can help them do both at the same time.

Amid already intense competition for top workers, companies are looking for unique ways to attract and keep employees. Helping them pay down student loan debt while saving for retirement is a game-changer. The IRS has just approved one such plan, and many more will follow. Advisors can help facilitate these plans for business-owning clients who may want these strategies for themselves, for their existing staff and for their prospective employees.

Over the last decade, the amount of outstanding student loan debt in the U.S. has nearly tripled. This affects not only younger employees who are just entering the workforce but also older workers who are still paying off outstanding loans (in addition to other debt). Understanding this burden, business owners have been seeking ways to help employees manage that debt. Some of the more common approaches include signing bonuses, additional compensation based on current debt payments and direct payment on outstanding loans.

These options are beneficial to employees and also generate taxable income for the individual. On August 17, the IRS released a private letter ruling (PLR 201833012) approving a tax-deferred program to help offset student loan costs. The program was run through an employer’s 401(k) plan and is sure to create wider interest.

Student loan repayment programs: While the IRS’s private letter ruling did not name the company in question, Abbott Laboratories has confirmed to The Chicago Tribune that it was the employer that had requested and received the ruling. Abbott’s 401(k) plan allows pre-tax, Roth and after-tax contributions and provides a matching contribution. If the employee contributes at least 2% of compensation into the plan, the company makes a matching contribution equal to 5% of compensation. If an employee doesn’t contribute to the plan, he or she does not get the employer matching contribution.

Employees walk near an Abbott Laboratories sign at the company's headquarters complex in Abbott Park, Illinois, U.S., on Monday, July 14, 2014. Abbott Laboratories said it plans to sell its generic drug business for established markets to Mylan Inc., getting in return a share of the newly combined companies in a deal valued at about $5.3 billion. Photographer: Daniel Acker/Bloomberg
Employees walk near an Abbott Laboratories sign at the company's headquarters complex in Abbott Park, Illinois, U.S., on Monday, July 14, 2014. Abbott Laboratories said it plans to sell its generic drug business for established markets to Mylan Inc., getting in return a share of the newly combined companies in a deal valued at about $5.3 billion. Photographer: Daniel Acker/Bloomberg

Its new plan feature looked to extend that same contribution to employees that are making student loan repayments. Called a Student Loan Repayment program, or SLR, this 401(k) plan perk was added to the existing matching contribution rules.

Under the SLR, if an employee remits a student loan repayment equal to at least 2% of compensation, the company will make a nonelective employer contribution to the 401(k) equal to 5% of compensation. That means the employer will make a retirement plan contribution for the employee regardless of whether the employee contributed to the plan.

All employees are eligible for the program but must enroll before the end of the plan year to participate. Anyone who participates can opt-out at any time and employees cannot receive both regular matching contributions and SLR nonelective contributions.

Finally, all the plan qualification rules that apply to matching contributions also apply to the SLR nonelective contributions. That includes the eligibility, vesting and distribution rules, the contribution limits, and nondiscrimination testing.

The takeaway for advisors: This IRS ruling provides employers with another student loan-based incentive program that can be used to attract and retain talented employees. However, unlike the other methods mentioned above, contributions under this program are tax-deferred for the employee and tax deductible for the employer.

In addition, it could also help plans increase their participation rate for nondiscrimination purposes.

Even though the program was created by a large multinational corporation, plans of all sizes could utilize this approach, including solo 401(k)s funded by self-employed individuals.

Of course, private letter rulings generally cannot be relied upon by other taxpayers. Thus, if you are looking into this option, you will want to work with an experienced attorney to ensure compliance with all IRS qualification rules.

The ERISA group has written to the IRS requesting that it issue a revenue ruling or other guidance of general applicability so that this 401(k) feature can be available to all employer 401(k) plans without each company having to request their own private letter ruling.

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