According to Forbes, there are over 44 million Americans with student loan debt totaling a staggering $1.5 trillion. The only other debt larger than student loans is mortgage debt. Student loan debt creates a drag on the economy by reducing the amount of take-home pay young adults have to spend on housing, retirement, household formation, and general living expenses. This money-squeeze is especially acute for the Millennial generation because they possess the greatest amount of student loan debt. In an effort to accelerate student loan repayment and also encourage borrowers to start contributing towards their retirement, one unknown company applied for and received an IRS Private Letter Ruling (PLR) on August 17, 2018 allowing that company to match employee student loan payments, similar to what most companies do with 401k plans.
How the Student Loan Match Works
According to the published PLR, the unknown company is changing their 401k plan by offering a voluntary student loan repayment benefit where the company will make student loan payments on behalf of the employee as long as the employee makes payments towards their own student loans. The employee must make a student loan payment equal to at least 2 percent of their salary, then the company will make a matching contribution of 5 percent of the employee’s salary towards their student loans. Plus, the employee does not have to participate in the employer 401k plan to be eligible for this student loan repayment benefit. The objective is twofold: to help accelerate the repayment of student loan debt and also to encourage young adults to start saving. Hopefully once the employee pays off their student loans, they will redirect those same contributions towards their 401k plan. This matching idea is similar to what companies currently offer through a 401k match whereby if the employee contributes to their 401k, the employer will match the employee contribution, allowing the 401k plan to grow faster.
Not Available to Everyone
The PLR on student loans was issued to an unknown company who specifically asked the IRS for a review of their proposal. Hence, a PLR is between a taxpayer and the IRS and is “issued in response to a written request submitted by the taxpayer.” Therefore, a PLR cannot be used by other taxpayers as guidance. Soon after the PLR to the mystery company, the ERISA (Employee Retirement Income Security Act of 1974) Industry Committee, an advocate for employers, sent a letter requesting the IRS to issue a revenue ruling on the matter so that the student loan matching program would be available to all employers.
What’s Next
Employees with student loan debt should not get too excited yet, unless they work for the company who received the PLR. It is unknown whether the IRS will broaden the rules for all employers to offer similar plans. However, even if the program becomes eligible to everyone, employers may still be reluctant to implement it because of the increased burden to actually manage such a plan. Regardless, employees should find a reasonable balance between paying down student loan debt and making sure they are contributing towards their retirement.
Ara Oghoorian, CFA, CFP®, CPA is the President & Founder of ACap Advisors & Accountants.
ACap Advisors & Accountants is a “Fee-Only” wealth management and full-service accounting firm headquartered in Los Angeles, CA specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap at info@acapam.com or 818-272-8511.
