IRS ruling on student-debt help could prompt other plans to act

A private letter ruling from the IRS on one employer's effort to address student debt through its defined contribution plan could wind up spurring more plan sponsors to follow suit.

Helping employees manage growing levels of student loan debt falls under a broader effort among employers to promote employee financial wellness, which can enhance retirement outcomes, benefit experts said. Employers also see a focus on student debt as way to attract and retain younger workers.

In discussions about financial wellness, "the key trend is the tremendous amount of growth in student loan debt. (The IRS action) points plan sponsors to the fact that this is something that's worth their attention, not just in the 401(k) plan, but overall financial stability," said Lori Lucas, president and CEO of the Employee Benefit Research Institute in Washington.

The IRS private letter ruling, released publicly Aug. 17, responded to a sponsor's August 2017 request to amend a defined contribution plan to also offer a student loan benefit feature, seeking assurance that the new arrangement does not alter the plan's tax-qualified status.

The potential snag when adding such a feature is the IRS "contingent benefit rule" that prohibits employers from conditioning other benefits on whether an employee makes 401(k) contributions.

"That's one of the bigger qualification concerns," said Kimberly Boberg with Groom Law Group in Washington. The IRS ruling "gives other employers other ideas of something they know works (and) it gives ideas to avoid," she said.

The plan sponsor was not identified in the IRS letter, but is widely believed to be Abbott Laboratories, Abbott Park, Ill., which in June announced its new Freedom 2 Save Plan, saying it "is now tackling the student debt crisis head-on" with a program that avoids having student loans keep employees from saving for retirement as early as possible. In a news release, Steve Fussell, Abbott executive vice president for human resources, said: "If you've got old school debt, we've got new-school retirement investing." Abbott contributes 5% to the 401(k) plan, if the employee — who could also contribute — allots 2% of their eligible pay to student loan repayment.

"It is a great example of a company really trying to encourage younger workers to participate in a retirement plan. It's a huge issue on sponsors' minds to try to come up with solutions. They are looking at ways to try to help younger workers coming out of school and making sure that doesn't deter them from participating in a retirement plan," said Dennis Simmons, Washington-based executive director of the Committee on Investment of Employee Benefit Assets, which represents 104 U.S. corporate pension sponsors with $2 trillion in retirement assets.

While the IRS private letter ruling is company-specific and does not apply to other employers or plan designs, plan executives and consultants say it gives other employers an idea of where to start. "I think the private letter ruling is going to kick-start a lot of interest in this. Employers don't have to get one, but it gives them certainty," said Jeffrey Holdvogt, employee benefits partner in Chicago with McDermott Will & Emery LLP.

It also lets IRS officials know there is growing interest, which in turn could prompt regulators to issue more generic guidance that could help other plan sponsors.

An Aug. 29 letter from the ERISA Industry Committee in Washington asked IRS Acting Commissioner David Kautter to do just that. ERIC officials believe that current law allows employers to make contributions to retirement plans on behalf of workers repaying student loan debt, but they want that clearly articulated to protect a plan's tax-qualified status.

The recent ruling "is a significant step in the right direction," said Will Hansen, ERIC's senior vice president of retirement policy, but more employers would be encouraged to implement such approaches if the IRS issued a revenue ruling or other guidance of general applicability.

Student debt "has been a big part of the conversation over the last few years. We have seen more and more plan sponsors really thinking through how they approach it, especially the plan sponsors who think about financial literacy," said Harry Dalessio, the Hartford, Conn.-based head of Prudential Retirement's full-service solutions group.

Ms. Lucas of EBRI noted student debt also has come into sharper focus with the success of automatic enrollment and escalation features. Such features could be too successful, said Ms. Lucas, if they scare off potential contributors to defined contribution plans who are more worried about student debt.

And while employers tend to focus on millennial workers, "we are finding there's lot more student debt across all ages," said Ms. Lucas, as tuition costs rise.

According to EBRI, 60% of employees with student debt are paying for their children's college loans, making it more than a millennial issue. While younger families had the highest percentage of student debt, at 45% for family heads under 25, families with heads 45 and older had larger increases, more than 300%, in the percentage with student debt.

Income seems to be less of a factor. "In focus groups, the thing we heard consistently that is both interesting and alarming is there is not as much as correlation between struggling (with student debt) and salary levels," said Ms. Lucas.

Income disparity does raise a potential IRS concern, if a student loan benefit winds up benefiting higher-paid employees and throwing non-discrimination testing of benefit plans out of whack.

"You really have a challenge," said Neil Lloyd, Vancouver, British Columbia-based head of U.S. DC & financial wellness research for Mercer. "Before you do anything, make sure you understand your population."

Along with employees' own sensitivity to benefit fairness, there is also a public policy concern. Given that higher-income workers are more likely to have student debt, "we have to be careful when it comes to public policy. We don't want put in place preferences that only help higher income people, and we need to make sure we are doing it in a way that doesn't hurt (others)," said Shai Akabas, director of economic policy at the Bipartisan Policy Center in Washington.

Dealing with student debt "comes up with almost every single conversation we have with an employer," said Mr. Lloyd of Mercer.

Prudential's Mr. Dalessio said his team is seeing several strategies emerging among clients, including debt counseling programs, student loan consolidation, direct employer contributions outside the 401(k) program and approaches like Abbott's. "It is still relatively early and probably fragmented. My belief is that it will become a standard offering as part of a financial wellness platform. The retirement conversation has become much more holistic," said Mr. Dalessio.

Lew Minsky, executive director and CEO of the Defined Contribution Institutional Investment Association, expects "more and more plan sponsors will want to think about plan design and ways they can help employees manage their balances. The good thing about developments like this is, it gets people thinking."