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)?

IRA and 401(k) rulings - the law is complicated!

There have been a few rulings recently involving IRA or 401(k) distributions that led taxpayers to court. That's a lot of time and expense. One taxpayer was a tax lawyer in a large law firm who would be viewed as a tax expert - with tax knowledge well beyond most (he lost in court). Another involved a wife (later to become ex-wife) taking funds from her husband's IRA without his knowledge. And another case involved an ex-wife using her ex-husband's 401(k) to obtain money he owed her. Without knowledge of the tax law or how to think in a tax-like manner, she did not realize she would owe tax on that distribution and should have instead told the husband to take the distribution and pay her from those funds.

Yes, the law is complicated. I don't think it can be fixed to help someone stealing funds from a spouse, but it should not be so complicated as to trip up a tax expert or someone who really thought she was just getting a debt repaid.  I think there are ways to simplify all of this. Perhaps only allowing Roth IRAs would be a way to go. What do you think.

Click here for my summary of and links to the three rulings at CPELink's blog site.

What do you think?

Broadening Participation in Retirement Plans

The world has changed yet tax systems have not caught up. For example, years ago, many employees could expect to have a defined benefit type retirement vehicle provided by their employer. This required little action by employees. They did not have to understand investment options, contribution requirements, and tax rules. Today, many employees are offered no retirement plan and so must figure out on their own how to set up an Individual Retirement Plan (IRA). They have a choice of tax vehicles for the IRA (such as regular or Roth) and they have many options as to where to set up their IRA (stock brokerage firm, bank, etc.). Some employees have an employer-sponsored IRA, but that is still more complicated than a defined benefit plan provided by an employer. Some employees have retirement options through their work, but do not participate.

Many workers do not expect to stay, and in fact do not stay, at one employer for many years. Thus, even if an employer sponsors an IRA or 401(k) plan, the employee will need to be involved in the management and movement of the funds when they change jobs. Employees who changes jobs several times could end up with multiple accounts if they do not or cannot consolidate the funds saved at each place of employment into a single retirement plan.

There is a greater need for workers to have retirement savings today than was true decades ago - people are living longer. Also, they may not get their entire expected amount of Social Security benefits.

Tax and labor law changes to increase the number of workers participating in retirement plans should consider the following:

• All workers should have a retirement savings account – even if part-time and even if their employer does not help with administration or contributions.
• Retirement savings contributions should go hand-in-hand with payroll tax deductions. They should be automatic with the worker having to take action to either stop it or modify the percentage amount. A system to enable self-employed individuals to also make contributions along with SE tax payments should also be considered.
• Helping individuals improve their financial literacy.
• Portability.
• Simplicity.

The government can play a role in establishing accounts, simplification, and educating individuals.

[For some background data on retirement plan participation and issues to be addressed, see “Rethinking IRAs” by Nellen, AICPA Tax Insider,7 /24/08 at   and  11/20/08 on 401(k)s.]

Suggestion for a New Approach

The first time an individual receives a W-2 or pays self-employment tax (whichever happens first), the government could set aside a set dollar amount in a retirement account for that person. This is the start of their retirement account. When the individual works for an employer who also wants to contribute to employee retirement accounts, the individual has an account to make that happen. Also, for each paycheck or quarterly estimated tax payment of a self-employed individual, a percentage is contributed to their retirement account. Individuals may transfer their retirement account to a commercial broker for management or let it stay with the federal government. The federal government would be allowed to transfer management to third parties for a fee.

Annual reporting would be required to let individuals know how much is in their account. Rules would continue to exist, but in more simplified form, governing how much could be contributed annually, how much employers could also contribute, the age when distributions must begin, hardship withdrawals, etc.

Benefits of this approach:

• All individuals who work will have a retirement account.
• The initial contribution from the government ensures that all workers start a retirement account.
• The initial contribution from the government may also encourage individuals to be tax compliant from the start of the time they begin earning money.
• The system ties to payroll tax withholding and so should not be burdensome to any size employer since they already are required to comply with payroll tax rules.
• For low-income workers, the annual contribution could be made via part of the EITC the worker receives.

Some parts of this approach look like the Social Security system (paycheck withholding, some government assistance in tracking contributions). Consideration should be made to how these systems can work together in terms of annual reporting. The retirement savings though would be separate from Social Security funds and individuals would be able to manage their retirement funds by having them at a commercial brokerage account where they would likely be offered various investment options.

What do you think?