At Peanut Butter, we're always looking at new ways for employers to make student loan repayment a fiscally advantageous benefit to offer employees. We also go to great lengths with our attorneys to understand IRS and tax laws, so employers don't find themselves in a tricky situation.
Recently, we've fielded questions about ways to leverage existing 401(k) benefit funds to offer Student Loan Repayment. On the surface, it sounds great for your bottom line if you can use existing funds to offer an additional benefit, and even better if those existing funds are pre-tax dollars.
Unfortunately, there is a LOT of risk in this type of benefit plan design. Here are three tips that, together with your legal counsel's advisement, can help keep you out of hot water.
Tip #1: Make sure your organization fully understands the IRS contingent benefit rule.
The contingent benefit rule is an Internal Revenue Code limitation imposed on 401(k) plans (set forth in Section 401(K)(4)(A) of the Code). You'll want to consult your tax attorney to fully understand it and make sure you're compliant, but at a high level:
- You may be in violation if you offer student loan repayment as an either/or benefit alongside a 401(k). That is, if you offer the employee to either elect a set of funds to be applied to his/her student loan repayment or a 401(k).
- You may be in violation if you are providing a benefit other than a true match (or mirroring) contribution under the 401(k) plan. The contingent benefit rule is very specific that benefits outside of matching contributions have strict requirements on whether an employee has the right to say that the employer should avoid making a contribution to one benefit in order to receive benefit funds elsewhere.
Tip #2: Ask counsel to advise on additional fees if you offer a "forced employee match"-type plan design.
We understand that it's attractive for employers to ask their employees to make a matched contribution to their student loan repayment. And, it may seem like a simple idea to explain to employees because many 401(k) plans work in this way.
It is still less complicated, however, with less risk of additional fees, to offer a no-strings-attached direct student loan repayment benefit to employees. This is another area to consult with your legal counsel, but here are some basic guards against requiring a forced employee match:
- More IRS regulations: 401(k) plans have strict rules. Allowing employees to elect to take their match in a cash repayment of their student loan likely creates a deferral feature under 401(k) that would need to satisfy the cash or deferral rules, including testing to prove highly compensated employees are not favored by the benefit.
- FICA taxes: Cash or deferred payments as part of a "match" program may trigger FICA taxes, whereas a direct contribution program may not.
- Tax/ERISA legal fees: If you don't have full-time counsel on staff, or if your counsel is not specialized in tax/ERISA law, your company could incur additional fees to in benefit plan design review and consultation.
Tip #3: The more complicated your benefit design, the longer it will take employees to "get it", reducing engagement and your return value.
If you are excited at the prospect of announcing a student loan repayment benefit to your employees, don't let a complicated plan design cause delays. Benefits themselves (health, disability, 401(k)) are often tricky enough for employees to understand. To maximize the speed of return you see from a student loan repayment plan, consider the value that a direct, no-strings-attached plan design offers:
- Speed of roll-out: If there are less rules to explain, then training your HR department and drafting communications to employees is much more simplified. This can reduce the time it takes your organization to roll-out the program officially, which makes everyone involved in the benefit project look like a superstar internally.
- Greater engagement: Your HR department will have an easier time explaining a direct benefit offering to employees and employees will understand the value you're giving them more easily without complicated enrollment rules. And you, as the employer, get to bask in the social goodwill of reducing your employees' financial debt burden. You may even consider doing a press release to announce that goodwill to your community.
- Competitive edge: As soon as your student loan repayment program is live and you're able to announce it to prospective hires, you'll stand out against other employers whom you compete with for talent. This can improve the number of candidates in your talent pool and allow you to select from the best and brightest to fill open positions.
At Peanut Butter, we are deeply invested in helping our clients make the student loan assistance decisions that are best for them and will help their business thrive. In addition to the Student Loan Repayment benefit discussed in this article, Peanut Butter also offers Student Loan Resources, which some employers choose to offer as a first step toward helping their employees pay down their student debt.
Visit our website to learn more about Student Loan Assistance programs.
Or, get started to begin designing your student loan assistance program.