IRS Ruling Permits Student Loan Benefits Through 401(k)s

A recent study by the Center for Retirement Research at Boston College found that, while student debt does not discourage 401(k) participation, college graduates with student debt accumulate 50 percent less retirement wealth in their 401(k) by age 30 than those without debt. However, a private letter ruling released by the Internal Revenue Service (IRS) in August could help increase 401(k) balances for this group. The IRS letter affirms that, under certain circumstances, an employer can link the amount of its 401(k) matching contributions for an employee to the amount of student loan repayments made by the employee outside of the plan. The ruling could make it easier for employers to use their 401(k) plans to assist employees who are repaying student loan debt, which has tripled to about $1.4 trillion today. Participation would be voluntary in this type of program, but participating employees would be eligible to receive nonelective contributions based on repayments equivalent to what they would have otherwise received if they had made contributions to the plan. The student loan repayment benefit is subject to nondiscrimination testing, contribution limits and other requirements for a qualified plan. This program should be virtually cost-neutral to the employer in that the employer’s contributions are equal to what they would have been if the employee had contributed directly to the plan.

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