Americans age 55 to 64 have saved only about 12 percent of the money they need for a comfortable retirement. That figure is even worse for younger generations. Though many have access to employer-sponsored retirement plans, only about 52% of Millennials participate in such plans. With student loan debt standing at around $1.5 trillion, workers of all ages often have a difficult choice to make – whether to pay their student loans or save for retirement.
Employers have sought ways to ease their employees' crushing student loan debt while simultaneously providing a
plan to build retirement savings. One employer, seeking confirmation that its plan would comply with federal laws and regulations, opted to go straight to the source – the Internal Revenue Service.
A Brief History
On August 9, 2017, a company later confirmed to be Abbott Laboratories (“Abbott”) asked the Internal Revenue Service (IRS) for a determination about amending its 401(k) plan to address student loan repayment. The plan proposed by Abbott provided for the following:
The employee must qualify for the company’s 401(k) plan. In this case, the employer has a defined contribution plan with a section 401(k) cash or deferred arrangement feature operating under section 401(a).
The employee may enroll voluntarily in Abbott’s student loan benefit plan.
An enrolled employee must make a student loan payment equal to or greater than 2% of his or her eligible compensation.
The employer then makes a Student Loan Repayment (SLR) nonelective contribution of 5% of the employee’s eligible compensation.
If the employee makes elective contributions, but does not make a student loan payment, the employer can still match up to 5% of the employee’s eligible compensation.
Abbott’s request involved amending its plan in such a way that SLR nonelective contributions did not violate any provisions of section 401(k)(4)(A) or section 1.401(k)-1(e)(6) of the Income Tax Regulations. Specifically, Abbott was concerned about the “contingent benefit” prohibitions contained in the regulations.
Abbott and the IRS exchanged several letters regarding Abbott’s request, with the IRS submitting its final response on May 22, 2018.
Pertinent Sections Related to Student Loan Payments and 401(k) Plans
The two provisions at issue, and about which Abbott requested clarification, are:
- Section 401(k)(4)(A)
- A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is 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. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by reason of such an election. and
- Section 1.401(k)-1(e)(6)
- A cash or deferred arrangement satisfies this paragraph (3) [Additional requirements for qualified cash or deferred arrangements] only if no other benefit is conditioned (directly or indirectly) upon the employee’s electing to make or not make elective contributions under the arrangement. The preceding sentence does not apply to (A) any matching contribution (as defined in section 1.401(m)-1(a)(2)) made by reason of such an election …
For Abbott, the question is whether their retirement plan violates the “ contingent benefit ” prohibition by requiring the employee to make elective contributions.
The Internal Revenue Decision
The IRS response indicates that Abbott’s proposed plan will not “violate the ‘contingent benefit’ prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6).” However, the IRS goes on to note the assumption that Abbott “will not extend any student loans to employees that will be eligible for the program.”
The response stops short of providing an opinion about federal tax consequences related to Abbott’s amended plan. In addition, section 401(a) requirements were not addressed in the response.
Finally, the IRS specifically notes that the opinions stated in the response are directed to Abbott and should not be considered precedent-setting.
Where Do We Go from Here?
Employer-sponsored retirement programs are already an important component of benefit plans. Now, employers may help their employees pay their student loan debt without sacrificing their 401(k)s.