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Matching Student Loan Repayment: A Creative Employee Benefit

| September 24, 2018

Many recent college graduates find they have a difficult decision to make:  contribute to their employer’s 401(k) plan or focus on student loan repayments.  The choice between paying down debt and funding retirement can be a tough one, especially when employers offer a 401(k) match. 

Recently, an employer who wished to help encourage their employees to pay off their student loans, if that was their priority, amended their 401(k) plan to include an employer contribution to the plan conditioned on them making a student loan repayment rather than making a deferral contribution to the plan. 

The IRS received their proposal for approval and wrote what is known as a Private Letter Ruling (PLR 201833012) that allowed for this employer to create a program with some of the following features:

  • If an employee enrolls in the program and makes a student loan repayment (SLR) of at least 2% of their eligible compensation, the employer will make an “SLR non-elective contribution” to the 401(k) at the end of the plan year equal to 5% of the employee’s compensation.
  • The employee must be employed on the last day of the plan year (except for termination due to death or disability) to receive the employer contribution.
  • If an employee opts out of the program, he/she will resume eligibility for regular matching contributions under the plan.
  • Since the “SLR non-elective contribution” is not contingent on the employee deferring compensation into the 401(k) plan, the IRS rules that this does not violate the 401(k) rules. Additionally, employees who make student loan payments may still be permitted to make elective deferrals under this program.

While the IRS has ruled in this particular case that their program is allowed, employers should note that PLRs may not be used or cited for precedent.  However, this may be used as a helpful guidepost in designing programs like this, which can help employees feel better about paying down their student loans by not missing out on benefits of employer contributions. 

Additionally, for those of you who are still paying down student loans and are looking for ways to pay them off faster or with less impact to you budget, there are refinancing options through places like Sofi and Citizens Bank.  Refinancing may help to lower the interest rate and/or payment amount.  Keep in mind however that by refinancing Federal student loans, you may lose certain repayment options like income-based repayment.  Also Federal student loans are forgiven upon death, but this may not be the case if refinanced.

Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.