Student loans are a big problem in America, and employers are finally starting to take notice. Although there’s a still a lot of room to grow, tuition repayment assistance was the hottest employee benefit of 2017. As time goes on, I have high hopes that this trend will only continue.
There are typically two pain points with these programs, however. First, tuition assistance is often offered by employers as an either/or alternative to participating in the company’s 401k program. Second, any assistance offered is viewed as taxable income in the eyes of the IRS.
An innovative program, designed by Abbott Laboratories in Chicago, has found a way to address both of those problems. And it may provide a model for the rest of the country to follow.
Here’s how it works: Abbott has received permission from the IRS to provide a matching contribution to an employee’s 401k whenever he or she makes a payment towards student loans.
The plan is simple, but also brilliant.
Through this program, Abbott is able to take employees who are responsibly trying to pay down their student debt and reward them by making:
- Non-taxable contributions to their…
- Retirement nest egg
This is so important because student debtors are falling dangerously behind in retirement savings. In June, Boston College found that student loan borrowers are saving half as much by age 30 as their peers with no student debt.
As we’ve discussed before, when it comes to retirement savings, time is the key ingredient. Workers really do need to be contributing to their retirement before age 30 to get the best bang for their buck.
What makes Abbott’s situation so unique is that it may, in fact, be the first time that the IRS has approved of an employer’s contributions being conditioned on an employee doing something separate from the retirement plan.
This is unprecedented and exciting!
Abbott is able to offer a 5% 401k contribution to all employees who dedicate at least 2% of their paycheck towards student loan repayment. This is the same match that they offer employees who make 401k contributions.
Other companies, and even the ERISA Industry Committee have taken notice of Abbott’s program and have asked the IRS to issue broader guidance. For now, businesses can continue to request individual permission to offer similar programs of their own, but the ERISA would like to see the IRS simply make the rule generally applicable.
The IRS has yet to respond.
So, like most things that involve the federal government, this one’s surely going to require some patience. Yes, this is unlikely to be an overnight industry shift, but this is certainly an encouraging move in the right direction.
In the near future, paying down debt AND saving for retirement in a tax-sheltered account may not need to be mutually exclusive choices.
Who knew!?
For more student loan repayment tips and advice, check out our Complete Guide to Getting Out of Student Loan Debt.