For Your Benefit

Student Loan Payoff Pays 401(k)s
Despite overall positivity, experts warn of hidden pitfalls.

By Patty Kujawa

I

n an effort to help workers achieve certain financial wellness goals, the Internal Revenue Service recently issued a ruling allowing one company to make contributions to 401(k) accounts on behalf of those who pay off a certain percentage of student debt.

The IRS private letter ruling, issued last summer, was a response to an unnamed company’s request to amend its plan so workers who voluntarily agree to put at least 2 percent of pay toward a student loan would be eligible to receive an employer contribution equal to 5 percent of pay to their 401(k) plan.

The company — reportedly pharmaceutical giant Abbott Laboratories — asked for the IRS ruling last year because it was concerned it was violating a rule that bans employers from setting certain conditions before employees can become eligible for other benefits. Because the employer 401(k) contribution is triggered by the employee first opting to make the student loan payment, the IRS said the company was not violating the rule.

Experts applaud the ruling because it’s another strategy in the financial wellness initiative many companies are adopting to help workers take care of money issues today while preparing for the needs of tomorrow. For employers, this program may save money because it would eliminate the need for a separate student loan program as well as any contributions the company might make to it. While the ruling is specific to one company’s situation, many believe it will pave the way for other organizations to follow.

“There is some cost, but it is minor relative to a separate student loan program,” said Robyn Credico, defined-contribution consulting leader at Willis Towers Watson. “Clients are looking for financial wellness solutions like this and it won’t be a huge burden, cost-wise. It’s a great recruiting tool, too.”

While most agreed the ruling opens the door for organizations to help employees pay off debt today and save for retirement, there are a few glitches.

First, it creates a false sense of security, said John Lowell, partner at October Three Consulting. Most industry experts recommend saving between 10 percent to 15 percent of pay annually to retire on time, and 5 percent is well below that mark. In addition, a 2 percent reduction in a loan might not even be enough to cover interest payments.

“There are a lot of hidden pitfalls,” Lowell said, adding that he supports the initiative. “I think companies need to think this through.”

In addition, it might be hard for the company to track whether the employee is really paying down the student loan, Lowell added.

Overall, Credico and Lowell agreed that the program is a good start. Employers interested in using it would need to amend their plan and check with plan attorneys to make sure the program follows the same structure as in the private letter ruling.