The IRS has recently published a policy letter, which allows employers to match student loan debt payments (made by the employer on the employee’s behalf). There’s certain minimum and maximum limits that need to be met, but overall this new policy letter looks to be very promising.
Here’s how everything started. Originally, a company (who’s name was not disclosed in the IRS policy letter) requested to start a 401K matching program that matched a certain percent of the money employees pay each month toward their student loans. Last month the IRS approved the program for that company. As a result, many other companies are now looking to do the same thing at their businesses. With an improving economy and an increase in the amount of jobs available to workers, it’s no surprise employers are looking for new ways to retain quality employees.
What This Means For Employees
This new policy letter potentially opens the door for employees who were interested in contributing to a 401K plan; but due to a limited surplus in monthly income, were not able to do so. Student loan debt is higher than ever in the United States today. Many people who are getting established in their careers often struggle to cover all of their expenses each month. Additionally, young employees usually make less money than experienced employees do. Yet, they often have similar monthly expenses. As a result many young people don’t always have extra money to contribute toward a 401K plan every month.
This new policy letter could be a game changer for young employees, since it would make it easier for them to reduce their student loan debts and build up their 401K. This program works similar to standard 401K matching programs, where employees contribute a certain percent of their income to their 401K and employers match that amount at a certain percent. The main difference in this program is employees are not required to directly deposit any money into their 401K plans. Instead, employees are required to pay a minimum amount each month toward their student loans (at least 2% of their monthly income). Employers will then make matching contribution based off the employees student loan payment (up to 5% of the employees income) and deposit the contribution into the employees 401K.
What This Means For Employers
Employers are happy about the potential benefits of this program because it offers another way for businesses to attract and keep quality employees. In the last few years the job market has become much better for the worker. More jobs and higher income levels are awesome. However, in accordance with laws of supply and demand, more available jobs with the same number of potential candidates, means more completion for employers who are looking to higher or retain employees. As a result, employers are consistently looking for new ways to make their companies attractive to employees.
This new type of 401K program is just one of the many examples today of business working to retain employees. Under this 401K program employers are able to contribute up to 5% of their employees income as long as employees are paying at least 2% of their income toward their student loan debts each month. Overall we think this is a win-win for both employees and employers. Employees are able to contribute money toward their 401K plans, even if they’re short on cash, and employers are able to retain quality employees as well as benefit from a new source of tax write offs. Under this 401K program, employers are able to write off the contributions they match as expenses during the current tax year.
Overall this type of 401K program looks to be a win-win for employees, employers and the IRS. Employees, who previously wanted to contribute to a 401K plan, but due a lack of funds, were unable to do so, now maybe able to. This program also benefits employers since they’ll have a new way to attract quality employees and have a new a new source of tax write offs. The money employers contribute will be seen as additional employee income. This helps the IRS because it will create a new source of tax revenue. This program is in the early stages and may change in the future. However, if things don’t change too much, this could be very beneficial for people looking to reduce their student loan debt as well as for employers looking to retain quality employees.
Maldonado, Camilo (2018, August 29). IRS Ruling Allows Company To Match Employees’ Student Loan Payments Into Their 401(k) [News]. Retrieved from https://www.forbes.com/sites/camilomaldonado/2018/08/29/irs-ruling-allows-company-to-match-employees-student-loan-payments-into-401k/#1b02fc582861