For Your Benefit

Student-Loan Matching Hits Snags
Some gray areas seen as potentially ripe for abuse.
By Patty Kujawa
Some gray areas seen as potentially ripe for abuse
P

lan sponsors have shown a lot of interest in a recent ruling that allowed one company to make 401(k) matching contributions while employees repay their student loans, but two attorneys following the progress of the idea are doubtful that federal guidance allowing others to implement the idea will be issued any time soon.

In August 2018, the Internal Revenue Service issued a private letter ruling allowing an unnamed company 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.

That letter addressed the issue facing 44 million graduates today: the $1.5 trillion they carry in student loan debt. Organizations also are seeing a rapid rise in popularity for plans that ease the loan burdens of recent grads.

Since that time, the IRS has met with trade groups to talk about possible federal guidance, said David Levine, a principal at Groom Law Group who was speaking at the Plan Sponsor Council of America’s national conference in April.

“The outcome of the meeting was not as optimistic as one might hope for,” Levine said.

Jeffrey Holdvogt, a partner with law firm McDermott Will & Emery, said that there are other ways to help employees with their student debt, but this private letter ruling was a strategic way to shoehorn the benefit into a tax-friendly vehicle. He suspected that other plan sponsors have been asking for similar private letter rulings, but the IRS has turned them down.

He and Levine agreed that there may be unintended consequences in broadening the scope of the initial private letter ruling or offering separate rulings to other plans sponsors.

First, the two agreed that the idea may get trumped by pending legislation. The Retirement Security & Savings Act, sponsored by Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, would allow employers to make matching contributions with respect to student loan repayments. In addition, the Retirement Parity for Student Loans Act, sponsored by Sen. Ron Wyden, D-Oregon, would allow 401(k) and 403(b) plan sponsors to make matching contributions on qualified student loan repayments. Employees must submit to the employer proof of the student loan and the loan repayment.

Next, Levine posed several questions about how this ruling, if expanded, could set a precedent for other repayment programs. It could get as crazy as someone buying a yacht and asking for compensation. The general issue of needing to pay off a large liability while saving for retirement fits the same scenario as the student debt question.

“Where do you draw the line?” Levine asked.

Levine cautioned that plan sponsors interested in adopting similar strategies in their 401(k) plans need to rely on the guidance exactly as it was outlined in the original private letter. Companies that simply follow the “spirit” of the private letter may wind up having issues with the IRS.