At Ancora, we act as fiduciary investment advisors for employer-sponsored retirement plans, such as 401(k)s. We often meet with the employees of these retirement plan clients to discuss the benefits of contributing to their plan and encourage them to save for retirement and other life events. In these discussions, we hear a lot of concern from young professionals about the financial burden of paying back student loans. In some cases, these burdens are so great that the employee simply cannot afford to contribute to the retirement plan, possibly missing out on the employer matching contribution that is often a provision of the plan. A recent ruling from the IRS provides some interesting perspective on this problem and one employer’s creative way to deal with it.
In this ruling, an employer (later publicly acknowledged to be Abbott Laboratories), asked the IRS for a ruling to approve a new matching contribution structure for their retirement plan. Under this structure, an employee who contributes at least 2% of his or her compensation to the plan would receive a matching contribution equal to 5% of compensation. In addition, and here’s what’s interesting, an employee who voluntarily participates in a student loan repayment program, and remits 2% or more of compensation toward loan repayment, would also receive the 5% match in the retirement plan. An employee would receive only one company match, even if he or she made contributions to both the 401(k) plan and participated in the student loan repayment program. The IRS approved this structure under very technical rules.
A few key points:
- The ruling is called a “Private Letter Ruling,” and it applies only to this employer. Another company cannot rely on this letter in adopting a similar structure and would have to seek its own ruling; a time consuming and costly process.
- Abbott’s simple matching structure made this program easy to comply with the very technical discrimination testing and other rules. Other more complex company matching structures might run afoul of these rules.
The key takeaway is that there may be new ways for employers to encourage their employees to repay student loans and to still reap a benefit through the employer’s retirement plan. A number of retirement plan advisor trade groups have contacted the IRS urging them to issue a broader ruling, applicable to all retirement plans, that provides guidance on how a program like this can be implemented.
Stay tuned for more information. Of course, please let us know if you would like more information about Ancora’s retirement plan advisory services.