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How The New IRS Rules Affect Student Loan Benefits

October 19, 2018

More companies are rolling out different types of student loan repayment perks to recruit millennial and Gen Z employees who are saddled with debt. 

"Over the last couple of years in general, as the labor market has tightened, there's been more competition for talent. One of the ways for companies to differentiate themselves is to provide additional fringe benefits – one of those is student loan repayment," says Eric Bronnenkant, head of tax for the online financial advisor firm Betterment. 

According to the Federal Reserve's most recent data, student loan borrowers collectively owe more than $1.5 trillion. U.S. News survey data show that of college grads who borrowed student loans, the average student debt balance among 2017 graduates was nearly $30,000; the data also show that the majority of 2017 college grads took out loans to pay for their education. 

A few Fortune 500 companies, like PricewaterhouseCoopers, made headlines three years ago for introducing student loan repayments as a new employee benefit. Under this type of perk, employers pay a set monthly amount – usually around $100 a month – to help pay employees' student loan bills. The only drawback: These moneys are taxable. 

But this isn't the only model to emerge among employers that offer student loan repayment benefits.

Abbott Laboratories, a pharmaceutical company headquartered in Illinois, plans to use its 401(k) plan to help employees with student debt; a 401(k) is a retirement savings plan sponsored by an employer that allows a worker to save pretax dollars into this type of account. 

Under the company's proposed plan, Abbott would make contributions to employees' 401(k) accounts based on the payments they make outside the plan to repay their student loans. Abbott employees who pay at least 2 percent of their income toward student loan repayments would be able to receive up to 5 percent of their income in employer contributions to their 401(k). Under the plan, if an employee earns $50,000 annually and pays $100 per month in student loan repayments, he or she will receive $250 in 401(k) contributions. 

The IRS issued a letter ruling in August affirming that employers under certain circumstances can link 401(k) matching contributions for employees to the amount of student loan repayments made outside the 401(k) plan. 

"The ruling opens the door for companies to explore ways to tie student loan repayment match. While a private letter ruling is really only for one individual taxpayer or company – in this case Abbott Labs – it's a guideline or blueprint as to how other companies might look at the issue," says Leigh Gross, vice president of partnerships at CommonBond, a marketplace lender for student loans.

"Any company that wants to be thought of as a great employer understands that student loans are crushing a lot of their employees – and it's not just the young ones," he says.

This style of tax-advantaged status may increase retirement savings among struggling student loan borrowers, student loan experts say. 

ccording to a recent report by the Center for Retirement Research at Boston College,student debt doesn't discourage 401(k) participation, but college graduates with student debt accumulate 50 percent less retirement wealth in their 401(k) by age 30 compared with those without one. 

"This is a phenomenal option because it kills two birds with one stone – recent grads pay down their college debt while simultaneously building their retirement savings," says Ryan Repko, an Illinois-based financial advisor at Ruedi Wealth Management. 

In light of this new type of student loan repayment perk, here's what recent college grads and millennials need to know.

More companies are likely to adopt the 401(k) model because it's a low-cost option. Companies should seek an IRS letter ruling on their own plans until the government agency puts forth an official interpretation, known as a revenue ruling.

Gross expects that "more aggressive and progressive-type companies" will offer this style of benefit after a few more IRS rulings.

This model is beneficial to employers because it doesn't have many additional out-of-pocket costs to their benefit plan, says Christopher P. Chapman, president and CEO of AccessLex Institute, which focuses on financial education and law school affordability. 

"The Abbott Labs model is one where they're attempting to have something that has a little sizzle in that it addresses an issue that affects most graduates today: student loans. But along with the sizzle, they're getting some bang for their buck," says Chapman, who adds that companies with this type of plan would not have to add an entirely new type of benefit similar to the student loan repayment option that PwC offers. "It's a low-cost benefit."

The 401(k) model helps debt-strapped employees with savings. Tax experts say since this is an employee benefit, without any employee cost, all employees should consider signing up for this if it's offered. 

"Employees should consider this option when they are not contributing to their 401(k)s, because it will automatically provide a company 401(k) match just for paying their monthly loans. Considering you are required to pay your loans every month, you can now pay yourself back at the same time, with this new IRS provision," Repko says.