IRS Will Allow Student Loan Repayment Benefits to Be Linked to 401ks
The Internal Revenue Service recently decided to allow employers to add student loan repayment benefits to their retirement plans.
The Internal Revenue Service has decided employers can add student loan repayment benefits to their retirement plans.
The typical college graduate owes tens of thousands of dollars in student loan debt after college, with the average being $27,975 among those who have borrowed money. Collectively, more than $1.5 trillion is owed in the U.S. for student loan debt, and that debt can influence people’s choices about where they will work.
Approximately 45 million borrowers owe some money for student loans. That’s a lot of borrowers who are in the workforce – offering this benefit could help a company draw in some of the best and brightest talent. That theory has been backed up by a 2017 American Student Assistance survey. Of the 500 people surveyed in their 20s and 30s, 86 percent said they would remain with a single employer for five years, providing they received help whittling down what they owed on student loans.
It costs companies money for training and hiring of staff, so if offering a student loan benefit can help companies retain their employees, it still may save them money in the long run. They won’t have to advertise for the vacated positions, and they won’t have to eat up valuable resources and time doing interviews and training. The less turnover, the better for a company.
How Would This Program Work
The process the IRS has green-lighted would work like this: Employers would kick in a 401k contribution for workers who make a student loan payment that totals at least 2 percent of their paycheck, Bloomberg BNA reported.
“The individual for whom this is a real benefit is an employee who wasn’t otherwise making 401(k) contributions,” said Jeffrey Holdvogt of the firm, McDermott Will & Emery in Chicago, told Bloomberg.
Other companies may choose to do their benefit differently, but at least now there is now an option if they want to go down the path of providing tax-free student loan benefits. Right now, student loan repayment benefits aren’t common among employers – only 4 percent offer any form of them.
These types of programs are still fairly new as businesses have only recently begun to offer them. Some companies offer reimbursements for an employee’s student loans, up to a certain amount for the year. And some companies have a cap on how long they’ll continue to make those payments or give reimbursements. They might have a cap of $1,000 a year for up to six years, for instance.
Other companies may not start that benefit until an employee has reached a work anniversary – for example, they might make an employee wait a full year of employment or longer before they begin to make payments or reimbursements toward the student loan.
But with these programs, the benefit is not tax-free. Although companies can offer tax-free benefits of tuition reimbursement, up to a certain amount, student loan reimbursements are not tax-free for the recipients.
Author: Shannon Serpette
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