Monday, October 19, 2020

Addressing student loan debt: Trailblazing companies and possible legislation

A handful of companies have led the way when it comes to student loan debt assistance for their employees. There’s also legislation pending in Washington that could impact the issue.

Watch episode #2 in our video series: For Your Benefit with HANYS Benefit Services. We’re taking a closer look at two such companies that have come up with creative, new employee benefits solutions to tackle the issue and possible legislation coming down the pike. 

The trailblazers: Abbott Labs and Fidelity

Abbott Labs

The problem: Abbott wanted to match student loan repayments. But since student loan repayments are not paid into a retirement plan, but to student loan issuer, they couldn’t directly apply a match contribution.

The solution: Contribute to the non-elective or profit sharing contribution type under section 401(a).

The details: To be sure they weren’t violating the code, Abbott Labs requested a private letter ruling to get IRS approval to make contributions with respect to the student loan repayments, which are not elective deferral contributions. When they received the private letter ruling in 2018, it made headlines.

Fidelity

The initial push: In 2018, Fidelity became the first company to offer a student debt benefit to employees by making an employer after tax contributions to offset their student loan debt. They also launched their own student debt employer contribution program for employees, and made it available to numerous other companies.

The follow through: In 2019, Fidelity created a program that allows employees to transfer unused PTO and use it to offset their student loan debt.

The results: To date, Fidelity has saved $22.5 million in principal and interest for their employees, shaving off more than 34,000 years in loan payments.

A growing trend

In retirement administration, we see a lot of 401(k) and 403(b) record-keepers starting to offer student loan debt solutions. It's almost become a requirement to keep up in competitive industries.

As these retirement services shift toward more holistic financial wellness, we also see more web-based solutions where employees can get guidance on student loan debt or receive help applying for relief services.

Now on to legislation

Previously, we discussed the CARES Act, in which Congress provided administrative forbearance for student loan debt, including interest and payments, for all federally issued debt through the end of September.

A lesser known provision: Within the CARES Act is the 2019 proposed employer participation in retirement act, which previously had bipartisan support in Congress. This provision allows employers to make contributions directly to student loan debt, tax free, up to $5,250 per annum.

The catch: This provision needs to be adopted by Jan. 1, 2021.

On the horizon

Most likely to succeed: The Portman Cardin Retirement Security and Savings Act probably has the best chance of getting passed out of all pending legislation on the issue. One of the things this act will allow is for employers to essentially do what Abbott Labs did, but in a way that allows for actual matching contributions when employees make student loan repayments.

The problem: If you're suddenly incentivizing your employees to transform their retirement deferrals into student loan repayments, you may have a lot less non-highly compensated employees saving to their retirement plan. That can cause the ADP test to fail.

The solution: The act addresses non-discrimination testing. By allowing a carve-out from non-discrimination testing for those employees, this proposed legislation makes the option more feasible.

As companies and government work towards addressing student loan debt, how and where Americans save their money will change too. We’ll continue to monitor the landscape to keep abreast of any changes that might impact our customers.

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