Smart 401(k) Plan to Help Employees with Student Loans

In PLR 201833012 (8/17/18), employer (T) sought a ruling from the IRS on whether it was permissible to amend its defined contribution 401(k) plan to allow T to make a nonelective contribution for an employee if that employee makes a student loan repayment (SLR). The option would be voluntary. The plan already included T matching contributions equal to 5% of the employee’s eligible compensation for the pay period.

Participating employees could still make elective contributions but could not receive regular matches on such contributions. T sought a private ruling from the IRS to be sure the planned amendment did not violate the “contingent benefit” prohibition at §401(k)(4)(A) and Reg. 1.401(k)-1(e)6). The IRS found no problem with the plan.

The IRS found that the plan did not violate any of the 401(k) rules.

While private letter rulings (PLRs) do not state the taxpayer's name, a taxpayer can volunteer such information. That is the case here and Abbott says it is their plan and ruling (6/26/18 press release). They call it the Abbott Freedom 2 Save Plan. 

Per Abbott, if an eligible part-time or full-time employee contributes 2% of their eligible compensation towards paying down their student loans, they receive Abbott’s 5% match into their 401(k) plan and do not need to make a contribution on their own. Abbott’s press release gives an example of an employee accumulating $54,000 in their 401(k) plan after ten years assuming a salary of $70,000 with 3% increases annually. (Also see Abbott’s infographic.)

Abbott started the plan because it found employees not contributing to plans because of their need to make payments on their student loans. Abbott employees appear to potentially have significant student debt as the company notes that most of its employees have colleges degrees and about one-third of the 1,000+ people under age 35 hired in 2017 had a doctorate degree and about the same had a master’s degree.

In 2016, the ERISA Industry Committee (ERIC) issued a press release (10/18/16) that it had asked Congress to “adopt legislation to support employers as they develop programs that assist their employees in both repaying student loans and saving for retirement.”

President Trump's Executive Order 13847 (8/31/18) on Strengthening Retirement Security in America calls for efforts to “expand access to workplace retirement plans for American workers.” Per the BLS, 23% of private-sector, full-time employees and 34% of part-time ones do not have access to a retirement plan from their employer. Complexity of plans for small employers is noted as an obstacle, as well as costs and risks of not properly following numerous rules. A key solution proposed to be explored by the Department of Labor is expanding access to multiple employer plans (MEPs).

The EO also calls for updating life expectancy and distribution period tables for required minimum distributions (RMDs) and determining how often they should be updated.

Queries:

• The PLR only applies to the taxpayer who requested it (Abbott). Will the IRS issue binding guidance applicable to all taxpayers with the same holding to provide assurance to other employers who make similar changes? The cost to obtain a letter ruling is $28,300!

• Will EO 13847 lead to other modernizations to retirement plans to let them reflect the ways we live and do business in the 21st century? For example, why not have retirement plans that tie to the worker rather than the employer? With a growing gig economy and workers changing jobs frequently, why not let them have a single plan of their own to contribute to and have employers contribute to within specified rules? With technology, this would not be difficult.

What do you think? What are new solutions to improve retirement savings and to help people pay down their student loans (or not to have such large debts in the first place)?