It’s no secret student debt has been a rising epidemic in our nation; over $1.4 trillion now owed in student bills country-wide. For countless millennials, it’s an easy trap to fall into, and while the reasons behind why student debt is so high in recent years are complicated, for many, it’s a situation that seems impossible to escape.
In a brilliant move to help lower student debt and empower millennial workers, the IRS has now opened a door for employers to contribute towards their employee’s student loans through an altered 401(k) plan.
The program, introduced in an private letter ruling, works the same way a 401(k) does, with similar rules and restrictions, but instead of saving towards retirement – a plan only 52% of millennials participate in currently – employees now have the option of putting tax-free dollars towards eliminating their student loans. Plus, as an added benefit, employers may also match employee repayments for additional savings!
Like all 401(k)s, this plan has limitations.
To be IRS compliant, a student debt 401(k) plan must:
• Be voluntary – an employee only receiving nonelective contributions for each student loan repayment if they choose to sign up for the plan;
• Have each contribution match what the worker would normally receive with a retirement plan, for each pay period;
• Replace any and all other 401(k) benefits – the employee choosing between either saving for retirement or paying off their student loans, not both;
• Not exceed $18,500 in yearly deferrals ($24,500 if over 50);
• Have all additional employer contributions perfectly match an employee’s deferral until an amount equal to 3% of that worker’s salary is reached, after which contributions are to be reduced by half until reaching the maximum 5%; and
• Abide by all other 401(k) limitations and nondiscriminatory laws.
While plan distributions are taxable, with a 10% penalty for emptying a plan before the age of 59 ½ (required minimum distributions beginning after age 70 ½), 401(k)s are generally seen as beneficial to everyone in the business world, as they serve to both help employees save tax-free, while often lowering a company’s overall tax bill and their bottom line by retaining worker loyalty.
And now, while an IRS private letter ruling doesn’t exactly mean a set new precedent, it does open the doors to hopefully take down two birds with one stone: student debt and absent millennial 401(k) participation.
If you have questions regarding this option, reach out to your investment advisor, or contact us for a referral.