Student Loan Debt Preventing Your Employees from Saving for Retirement? There May Be a Solution

Recent college graduates (and some not-so-recent ones as well) are often saddled with student debt to the point that they do not feel like they can afford more than debt service, rent, and living expenses. Certainly, they don’t always feel they can afford 401(k) plan contributions. That means that, in many cases, the recent grads are leaving an important piece of compensation on the table—if you don’t contribute to the 401(k) plan, you also miss out on the employer match.

And yet, 401(k) and matching contributions are particularly valuable when one is new in their career. The younger you are when you start contributing, the more time you have to accumulate earnings on those early contributions. Starting early is a key factor in building up a nest egg big enough to support you in retirement.

This may seem like the employee’s problem, but employers should also be concerned. Will retirement-age employees who have small 401(k) balances hang on well beyond the time when they have ceased to enjoy their work to grow their balances? Might they cease to be as productive in their role given their desire to move on? Will the employer’s 401(k) plan fail nondiscrimination testing because only the more experienced and highly paid employees can afford to make 401(k) contributions?

Employers have tried solutions like automatic enrollment to encourage retirement saving. But, employees can always opt out—and those who are conscientiously paying down student debt often do. Now, a recent private letter ruling from the IRS holds out the tantalizing possibility of encouraging debt repayment and retirement savings at the same time. The IRS approved a plan that offers employees the opportunity to get an employer retirement plan contribution of 5% based on the employee paying at least 2% of their pay period compensation toward repayment of student loans. Employees who don’t want or need to participate in the plan can still get a 5% match based on contribution of at least 2% of compensation to the 401(k) plan—a regular matching contribution.

The IRS approval of this feature applies only to the taxpayer who requested the ruling and does not guarantee that the feature meets all of the plan qualification requirements. Nevertheless, many commentators and employers are taking notice and considering adding similar features to their plans. Contact your GPM attorney if you’re interested—a change like this needs careful legal consideration in the context of your plan and your employee base.