New 401(k) plan design could help repay student loans

Gavel to Gavel

published in The Journal Record | April 25, 2019

Your employees likely have more student loan debt than any other kind of consumer debt, except mortgage debt. If you run an internet search using “amount of student loan debt,” you will quickly learn that Americans owe more than $1.5 trillion in student loan debt, far more than they owe in credit card debt.

Every day, your employees come to work thinking about all sorts of things that have nothing to do with doing their job: their families, their children, their health, their faith, and yes, how they will pay their student loans. The problem is that while your employees are thinking about all of these things at work, they may not be as focused on their work and may thus not be as productive.

Another problem that student loan debt creates is that many employees believe they have a choice between repaying their student loan debt and saving money in their employer’s 401(k) plan.

When faced with this choice, employees most often choose to repay their student loans and not save for retirement. Consequently, they lose out on the tax benefits of deferring part of their income. They lose out on their employer’s matching contribution. And perhaps most importantly, they will likely not be ready to retire later – and will likely work longer than they can, should, or want to.

Recently, a new 401(k) plan design has surfaced that may help. Last August, the IRS released a private letter ruling approving a new 401(k) plan design for Abbott Laboratories. Under the Abbott 401(k) plan, employees may elect to contribute a portion of their compensation to the plan and receive an employer matching contribution.

Abbott proposed to amend its 401(k) plan to offer a student loan benefit program under which employees could make a student loan repayment outside of the 401(k) plan and yet still receive the matching contribution within the 401(k) plan. The idea is that regardless of whether they make a 401(k) deferral or a student loan repayment, either way the employee receives the Abbott matching contribution. The IRS issued a favorable ruling to Abbott.

Since the IRS released this private letter ruling, a number of employers all across the country have been studying this new potential 401(k) plan design. There are a number of tricky legal issues to work through, but this has real promise.

This article appeared in the April 25, 2019, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.