Younger employees struggling to repay heavy student debt often delay saving for retirement. As a result, these employees lose the advantage of starting to save at an early age. Recently, Abbott, the pharmaceutical and medical products company, announced a new program to help employees build retirement savings in their 401(k) accounts at the same time they are repaying their student loans.

How it Works.

Abbott will provide a matching contribution of five percent of pay to the 401(k) account of each eligible employee who elects to contribute at least two percent of eligible pay to the plan. Under the new program, Abbott will provide the same five percent matching contribution to otherwise eligible employees who pay at least two percent of pay to third-party lenders, rather than to their 401(k) accounts.

For example, assume an employee with annual pay of $80,000, who makes student loan repayments of at least $1,600 per year to a third-party lender. Under the program, Abbott would contribute a matching contribution of $4,000 to the employee’s 401(k) account.

The innovative aspect of Abbott’s program is that an employee repaying a student loan receives a matching contribution without electing to contribute any pay to the 401(k) plan. The employee both repays a student loan and saves for retirement.

What Does This Mean for Other Employers?

Employers who are considering adopting a similar program must carefully analyze the pros and cons of such a program and its effectiveness in attracting employees with heavy student debt. It is also important for employers to analyze the tax guidance with respect to this type of program, as well as the rules applicable to 401(k) contributions, eligible compensation, vesting provisions, and non-discrimination rules.