A trade organization that lobbies on behalf of large plan sponsors of defined contribution plans is urging the IRS to extend a recent private letter ruling to all qualified plans.
Last week, the IRS greenlighted a new benefit offering from Abbot Laboratories that allows participants in the company’s 401(k) plan to earn the employer match of 5 percent when they defer 2 percent of salary to service student loan debt.
In June, Abbott, which sponsors a defined contribution plan with $6.3 billion in assets and 29,000 active participants, implemented its “Freedom 2 Save” program, enabling employees that qualify for the 401(k) plan to earn the company match even if they don’t defer the required 2 percent of salary to the plan.
In effect, the benefit gets retirement benefits to employees who have been delaying saving because of student debt obligations.
“With every decade you wait to start saving for retirement, the amount you need to save roughly doubles. This plan will give participants savings equal to our company 401(k) match if they are putting at least 2 percent of their pay toward reducing their student loans. Helping them with this challenge is the right thing to do,” said Steve Fussell, executive vice president of human resources for Abbott, in a press release.
The IRS’s private letter ruling did not name Abbott and was released after the new benefit was officially launched. In the letter, regulators said the new benefit would not affect the plan’s tax qualified status. But regulators also noted that the letter may not be used or cited as precedent by other plan sponsors.
Now, trade organizations that lobby for plan sponsors are pitching the IRS to go further and issue a revenue ruling that would enable all 401(k) plans to implement a benefit similar to Abbott’s.
In a letter to the IRS’s acting commissioner, the ERISA Industry Committee said it believes current law allows sponsors to contribute matches based on participants’ student debt repayments, but that the absence of clear guidance from regulators has left sponsors erring on the side of caution.
“We believe that more employers would be encouraged to implement programs similar to the one described in the private ruling letter if the IRS would issue a revenue ruling or other guidance of general applicability on this issue,” wrote Will Hansen, senior vice president for retirement policy at ERIC.
“Our request for broader applicability would give more sponsors flexibility to move forward,” Hansen told BenefitsPRO. “If the IRS is in favor of the idea, which they seemingly are, why not move forward with more applicability to all plan sponsors?”
ERIC’s membership is comprised of 100 large plan sponsors with at least 10,000 employees. Abbott is not a member. “Kudos to them for kickstarting this process. Hopefully we can move the ball farther down the field,” added Hansen.
Presuming the IRS is interested in extending Abbot’s private letter ruling to all sponsors, the question of when will depend on regulators’ available bandwidth to focus on drafting a new revenue ruling, said Hansen.
Abbott’s “really rich” existing matching contribution likely influenced the IRS to move forward with its private letter ruling for the company, he said.
But issuing guidance for broader applicability will require some legwork.
“There are more nuances we will have to look at to assure it would be a justifiable revenue ruling,” said Hansen, citing the question of whether the minimum contribution levels for sponsors that use safe harbor plans would be acceptable to the IRS, and how a potential ruling would impact ERISA’s non-discrimination testing requirements.
Not all of ERIC’s members would implement the benefit were the IRS to issue comprehensive guidance, but Hansen said many would be motivated to examine the options.
“It could take some time,” Hansen said. “But we’re excited to work with IRS to see what we can get done.”
A boon for Abbotts highly educated, young workers
Data from the Plan Sponsor Council of America shows sponsors with at least 1,000 participants have considerable interest in implementing some form of student loan benefit, but take-up rates have been paltry: Only 1.4 percent of sponsors surveyed by PSCA report offering a student debt repayment program.
The average student loan monthly payment for borrowers between the age of 20 and 30 is $351, according to the Federal Reserve Bank of New York.
For an employee earning $50,000 a year, or about $4,200 a month, the average monthly debt payment amounts to 8.63 percent of earnings. Under Abbott’s plan design, that employee is now eligible for a 5 percent match—$210 a month, or $2,520 a year—so long as they are paying 2 percent of salary down to student debt—or $84 a month.
For a company like Abbott, whose young workers often come with costly advanced degrees, the new benefit stands to be a game changer on the retirement savings front.
An employee starting at $70,000 a year in salary could see $54,000 accumulate in their 401(k) over 10 years, assuming a 6 percent average annual return and yearly merit pay increases, even if they defer nothing on their own to the plan. By the time the worker hits age 60, that would amount to hundreds of thousands of dollars in additional retirement savings, according to an example provided by Abbott.
The American Benefits Council, which counts more then 440 retirement and health care plan sponsors in its membership, is also advocating for the IRS to expand on its private letter ruling to Abbott.
“The ABC supports policies allowing employers to help overcome barriers to retirement saving, including student loan debt. Expanding the IRS private letter ruling would be a positive step,” said Jason Hammersla, vice president of communications for the ABC.
Both ABC and ERIC are coordinating lobbying efforts behind legislative efforts to give employers more options to address student loan debt through defined contribution plans. Hammersla noted the Retirement Improvements and Savings Enhancements Act, introduced by Sen. Ron Wyden, D-OR. The RISE Act would permit matching contributions to 401(k) and 403(b) plans and SIMPLE IRA plans in accord with qualified student loan repayments.
“Employers have been extremely proactive in developing innovative programs — including student loan programs — to improve employees’ financial security, and we will continue to work with the legislative and executive branch to ensure that they can continue to do so,” Hammersla said.