From student loan refinancing and forgiveness programs, to employer-sponsored repayment approaches, employers wanting to offer student loan repayment benefits to employees have a multitude of selections to sift through. Which ones should they consider implementing?
One type of student loan debt repayment program offered by some defined contribution (DC) plan sponsors is a match of contributions to an employee’s student loan debt repayment that goes into the employee’s DC plan account. Ross Riskin, assistant professor of Taxation and CFP program director at The American College of Financial Services, says, “That way, the employee gets to add to both their student loan payments and retirement savings.”
This type of student debt repayment program was approved in an IRS Private Letter Ruling issued in August of 2018 for employer Abbott. Because participants receiving a student loan repayment non-elective contribution can still make deferrals to the 401(k) plan and receipt of the contribution is not dependent on whether the employee makes deferrals to the plan, the IRS ruled the benefit will not violate the “contingent benefit” prohibition of the Income Tax Regulations.
Despite this, plan sponsors are still wary on offering these types of programs, due to fear of noncompliance, says Jeff Holdvogt, partner at McDermott Will & Emery. IRS Private Letter rulings apply to the plan sponsor requesting the ruling, and not to retirement plans overall.
“Plan sponsors are inherently conservative about these types of issues, no one want to make a plan design and a couple of years later, have the IRS come back and say ‘what you did was inappropriate and illegal.’ Until there’s either legislation that changes tax law or more guidance and applicability from the IRS, there is going to be some uncertainty out there on these issues,” he says.
This strategy differs a bit in the nonprofit space. According to Randy Lupi, regional vice president at AXA Advisors, K-12 employers don’t often contribute to a 403(b), usually because the match will be added to the state 401(a) pension plan.
Other types of student debt assistance programs
Another type of student debt assistance some employers are providing is a match of the amount employees pay toward their student loans—paying down the debt more rapidly. This method holds two potential cons: Some companies may hold restrictions on the number of contributions an employer could provide, and, unlike the first method, these employer matches are taxable, says Holdvogt.
“While it can be an attractive option, it is a taxable benefit to the employee because there’s no specific tax provision that would make it tax-free to the individual. So, part of the issue is employers are trying to provide a student loan benefit in a tax-incentivized way,” he says.
In an article, “Evaluating the Effectiveness of Employer-Provided Student Loan Repayment Assistance Programs,” Riskin notes that income-driven repayment plans—which allow for loan payments to better align with a borrower’s ability to pay rather than a traditional amortized loan—are offered to federal student loan borrowers. In addition, numerous forgiveness programs are also available for federal student loan borrowers, such as the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness Program (PSLF).
He says employers’ match of employees’ student loan debt payments are intended to reduce the principal balance on these loans, but it is possible that the loan servicers may not apply the additional monthly payment this way, and that could hurt employees’ qualification for income-driven repayment plans or loan forgiveness programs. “For example, if the required monthly payment due for Mike on his federal student loans is $100, and the employer were to make a payment of $141 without instructing the excess payment to be applied directly to principal, the additional $41 would apply to the next month’s payment. When Mike goes to pay the remaining $59 the next month to remain current in his repayment status, the $59 would not be considered a qualifying payment for the aforementioned repayment programs. Employers should make sure their plans are set up to ensure these instructions are accurately communicated to the applicable loan servicers,” the article states.
In addition, it is also possible that when a borrower makes an additional payment with the help of his employer, he will be placed in “paid ahead status.” Payments made while in paid ahead status to satisfy the monthly loan obligation are not counted as qualifying payments for income-driven repayment plans or in accordance with public service loan forgiveness rules.
For the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness Program, Lupi says employers should be attempting to connect with employees on the requirements for the programs, whether it’s through group educational campaigns or communications means.
“What type of loan counts for public service? What type of repayment benefit counts? Who is the sponsor of the federal program? Whether they file their taxes separately or jointly with a spouse, that makes a difference with adjusted gross income,” Lupi says.
Because workers confuse public service repayment programs to teacher loan forgiveness and other initiatives, it’s important for plan sponsors to educate workers on their eligibility and qualification status, and how they can take advantage of these opportunities, says Lupi. Teacher loan forgiveness programs, for one, often require teachers to work in a specific school district or have a specific title status. The Public Service Loan Forgiveness Program requires participants to work as a full-time employee and add their loan repayments to an income-driven repayment plan prior to consideration, he adds.
Working with a financial adviser or someone well-versed in financial services or partnering with insurance and retirement companies to add educational sessions can help increase overall comprehension, as most can provide a thorough analysis catered to ensuring participants are enrolled correctly and that their loans qualify, Lupi suggests.
Employers may also simply offer the benefit of providing employees with access to organizations that work with them to help them refinance or consolidate their student loans, according to Holdvogt.
Despite the varying opportunities, Holdvogt recognizes the swift revolution surrounding student loan debt programs in the retirement industry, more so now than in the past years. In February, a group of senators introduced the Employer Participation in Repayment Act, permitting employers to contribute up to $5,250 tax-free in their employees’ student loans.
“This is a rapidly changing area, and these types of benefits have only started to come into existence in the past couple of years,” he says. “There’s been a lot of interest from plan sponsor groups and a lot of action on this issue, and I expect a lot of changes in the next couple of years—whether that’s guidance or legislative action.”