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.