IRS Ruling Allows Employer 401(k) Match for Student Loan Payments

On August 17th, the IRS issued a private letter ruling that approved an amendment to a company’s 401(k) plan to allow the employer to make 401(k) contributions on behalf of employees who are actively paying off student loans.

Under the proposed plan in the example above, employees who can participate in the plan and who contribute 2% of their eligible pay toward their student loans through a payroll deduction would receive the 5% employer match to their 401(k). This allows employees to receive the employer match without being required to make any 401(k) contributions of their own, freeing up funds for additional student loan payments. Often students may have to forego participating in their employer’s 401(k) plan as their funds limit them to either a 401(k) contribution or a student loan payment, this plan allows an employee to do both.

Having this benefit can be a useful recruiting technique for those companies regularly seeking fresh talent from colleges.  As of 2018, student debt has reached a staggering $1.5 trillion and has officially earned itself the title of largest non-housing consumer debt. Having a student debt payment program allows companies to stand out compared to the competition and provide flexible benefits for students whose number one goal may be to pay off their student debt.

So what are the tax implications related to this type of benefit? While companies have been offering assistance for years in the form of Student Loan Repayment (SLR) programs, this program is the first that allows employers to assist while not increasing the employee’s taxable income. In a traditional SLR program, all income provided by the employer to assist with student loan repayment is treated as taxable income to the employee. With this new plan, employees are able to pay off student debt with after-tax dollars while still receiving nontaxable 401(k) contributions from their employer, creating no additional income to the employee.

While this ruling does not set a precedent for all, it does show that there are possibilities out there for programs that can adapt to the needs of the employee and the growing student debt balance. To find out more please contact a DKB member!