One of the more creative employee benefits to arrive on scene in recent years is the student loan repayment benefit. It is a benefit that allows employers to help younger workers out by contributing funds toward paying down their student loans. The benefit is more attractive now, thanks to a new rule that went into effect at the start of the year. The rule allows for combining student loan benefits with 401k plans.
Whether you are a benefits broker, a third-party administrator, or a senior HR administrator, you need to understand this new rule. It could have an enormous impact on how some of your employees utilize voluntary benefits.
The Basics of Student Loan Benefits
Student loan benefits are not difficult to understand. The basic principle is this: an employer wants to help workers with outstanding student loans improve their personal finances by getting those loans paid off. To encourage employees to put money toward loan repayment, the employer sets up a benefit plan and offers matching contributions.
Payroll deductions and employer contributions are combined and forwarded to the plant administrator. The funds are then directed toward paying off the employee student loans.
This basic description is not ironclad. There are different ways to administer a student loan repayment benefit. It is also not mandatory that employers offer matching contributions. Employers can contribute as little or as much as they want to.
What the New Rule Allows
Moving on to the previously mentioned rule, it comes to employers by way of a provision in the Secure 2.0 Act of 2022. The rule went into effect January 1st. It allows employers to match employee student loan payments with contributions that go into their 401k plans.
This is a great option in the sense that it still encourages employees to pay down their loans while also encouraging employers to contribute to employee retirement. The employee pays off past debt while the employer invests in the person’s future.
They Can’t Afford Both
The impetus for implementing the new rule is the reality that younger workers saddled with steep student debts often do not have enough money to put into their retirement accounts. They delay investing in a 401k in order to pay down their loans. But by the time the loans are fully paid off, they have lost too much time in the process of building a comfortable retirement nest egg.
Combining student debt benefits with retirement plans offers the best of both worlds. Students can both repay their loans and still contribute to future needs. As for the employer, the whole thing is seamless. It doesn’t matter to the employer where its contributions go. Whether contributions are put towards student debt or retirement does not impact the employer’s bottom line. But putting that money into an employee 401(k) can really have a significant impact years down the road.
The Tax Advantage Question
One thing that might dissuade younger workers from participating in a combined benefit is the possibility of losing the tax advantage of contributing to a 401k plan. Such contributions are made pre-tax, so the money is tax deferred. Foregoing 401k contributions in favor of higher student loan payments would temporarily increase a worker’s income tax liability.
The tax issued notwithstanding, combining student debt repayments with 401k investments is a brilliant idea. Here is hoping more companies warm up to it. You can never go wrong helping people pay off outstanding debts. The less indebtedness a person has, the more financial freedom he has as well. The combined benefit is one way to increase that freedom.