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Retirement Planning Archives | R | W Investment Management

Repay Student Loans or Save in a Retirement Plan? Why Not Both?

Many employees feel squeezed to both pay off their debt and save for their future. A recent Private Letter Ruling (PLR) opens the door for employers to help them.

The average student graduating in 2016 has $37,172 in student loan debt.¹ According to the New York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000.

What do these numbers mean for you? They mean that debt repayment is typically an employee’s foremost priority. It’s not just the newly minted graduates, either – typically, student loan repayment is stretched over 10 years with close to an 11 percent default rate.

In this climate, don’t be surprised when a desired prospective or current employee inquires how you can help them with their priority – debt reduction. Nor should you be surprised when you find that your debt-burdened employees are not using the savings opportunity of their retirement plan. Many employees feel too squeezed to both pay off their debt and save for their future. Those employees are frustrated not only by their lack of opportunity to save early, as is prudent, but also because they frequently miss out on employer matching contributions in their retirement plans.

Some employers are attempting to solve these issues. On Aug. 17, 2018, the IRS issued PLR 201833012. The PLR addressed an individual plan sponsor’s desire to amend its retirement plan to include a program for employees making student loan repayments. The form of this benefit would be an employer non-elective contribution (a student loan repayment contribution, or “SLR contribution”).

The design of the plan in the PLR would provide matching contributions made available to participants equal to 5 percent of compensation for 2 percent of compensation deferred, it includes a true-up. Alternatively, employees could receive up to 5 percent of compensation in an SLR contribution in the retirement plan for every 2 percent of student loan repayments they made during the year. The SLR contribution would be calculated at year-end. The PLR states that the program would allow a participant to both defer into the retirement plan and make a student loan repayment at the same time, but they would only receive either the match or the SLR contribution and not both for the same pay period. Employees who enroll in the student loan repayment program and later opt out without hitting the 2 percent threshold necessary for an SLR contribution would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.

The PLR asked the IRS to rule that such design would not violate the “contingent benefit” prohibition under the Tax Code. The Code and regulations essentially state that a cash or deferred arrangement does not violate the contingent benefit prohibition if no other benefit is conditioned upon the employee’s election to make elective contributions under the arrangement. The IRS ruled that the proposed design does not violate the contingent benefit prohibition.

All that said, it is important to note that a PLR is directed to a specific taxpayer requesting the ruling, and is applicable only to the specific taxpayer requesting the ruling, and only to the specific set of facts and circumstances included in the request. That means others cannot rely on the PLR as precedent. It is neither a regulation nor even formal guidance. However, it does provide insight into how the IRS views certain arrangements. Thus, other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they will not run afoul of the contingent benefit prohibition.

Companies are increasingly aware of the heavy student debt carried by their employees and are exploring a myriad of programs they can offer to alleviate this burden. This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the retirement plan at the same time the ability to avoid missing out on the “free money” being offered by their employer in the retirement plan (by essentially replacing the match they miss by not deferring with the SLR contribution they receive for participating in the student loan repayment program). This design is not meant to help employees accelerate their debt payoff. If that’s your goal, you would have to do so directly into the student loan repayment program – there is no conduit to do so through the retirement plan.

While the IRS ruled in regard to the contingent benefit prohibition, the PLR states definitively that all other qualification rules (testing, coverage, etc.) would remain operative. Thus, if you wish to pursue adding such provisions to your retirement plan, you must take care as you undertake the design.

The facts provided in the PLR were very basic, and the plan design is very basic in that it requires deferral/student loan repayment equal to 2 percent for a 5 percent employer contribution (either match or SLR contribution) with no gradations. This is important because gradations could create separate testing populations for each increment of the SLR contribution plan, since it is a non-elective contribution, not a matching contribution. This could become a nightmare scenario for non-discrimination testing and administration.

Alternatively, to avoid the potential nondiscrimination testing issues, the benefit could be designed to exclude highly compensated employees. However, that still doesn’t alleviate the potential administrative burden placed on your payroll and human resources teams. Most of the debt repayment programs are not yet integrated with retirement plan recordkeepers. That means that administering some of the interrelated elements of the two plans would have to be undertaken in-house.

There are more than a few consequential elements that you should be wary of while exploring opportunities to assist your employees and employment targets. In all cases it is recommended that you involve your retirement plan’s recordkeeper, advisor and even – in some sophisticated design scenarios – outside counsel to make certain they: (1) don’t inadvertently create qualification issues, (2) understand the potential for additional testing and perhaps additional financial considerations of the design; and (3) are prepared for any additional administration the program may require.

This month’s employee memo gives ideas for eliminating student loan debt. Even if you are not yet offering this benefit, the memo offers other practical ideas to assist your employee population with student loan debt.

¹Forbes. Student Loan Debt Statistics In 2018: A $1.5 Trillion Crisis

 

About the Author, Joel Shapiro, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

 

Exchange Your Old Retirement Solutions for New Ones

What is an Exchange?

An exchange is a turnkey solution for businesses that allows you to provide the benefit of a retirement plan while offloading much of the administrative and fiduciary responsibilities at a potential cost reduction. A team of professionals work together on your behalf, so you can focus on running your business, not your retirement plan.

Retirement Readiness

An exchange is a great way to help your employees reach retirement readiness by providing them with a savings vehicle like a 401(k) plan, but with less administrative burden and by transferring certain risks.

Fiduciary Risk Mitigation

The fiduciary has a legal obligation to carry out its plan responsibilities with prudence, good faith, honesty, integrity, service and undivided loyalty to beneficiary interests – in this case, retirement plan participants. When joining an exchange, a fair amount of fiduciary responsibility is taken off your hands.

Administrative Relief

Employers oftentimes don’t have the resources to effectively manage the complex requirement of administering a qualified retirement plan. With an exchange all plan administrative duties can be outsourced – a benefit typically only available to very large companies.

Cost Effectiveness

There’s strength in numbers. By teaming up with other businesses in an exchange, you can benefit from economies of scale and seamless processing that help reduce the costs associated with operating and maintaining a retirement plan.

For more information on exchanges, please contact your plan adviser.

About the Author, Jonathan Coombs
Jonathan provides guidance to plan sponsors across the country on retirement best practices regarding fee benchmarking, investment analysis, plan design, fiduciary compliance and participant outcomes. As an asset allocation specialist, Jonathan project manages key business development initiatives in the custom solution arena. He also serves as a fixed income analyst. Jonathan attended The Julliard School, where he obtained a Bachelor of Science in music and a Master of Music.

Is it Time for a Retirement Plan Check-Up?

It’s important to conduct regular check-ups on your retirement plan to make sure you are on track to reach your retirement goals. Below are a few questions to ask yourself, at least annually, to see if (and how) they affect your retirement planning.

 

  1. Review the Past Year
  • Did you receive a raise or inheritance?
    If yes, you may want to increase your contributions.
  • Did you get married or divorced?
    If yes, you may need to change your beneficiary form.
  • Are you contributing the maximum amount allowed by the IRS?
    In 2018 you can contribute up to $18,500 ($24,500 for employees age 50 or older).
  • Did you change jobs and still have retirement money with your previous employer?
    You may be able to consolidate your assets with your current plan. (Ask your human resources department for more details.)
  1. Set a Goal

What do you want your retirement to look like? Do you want to travel? Will retirement be an opportunity to turn a hobby into a part-time business? Will you enjoy simple or extravagant entertainment?

Take time to map out your specific goals for retirement. Participants that set a retirement goal today, feel more confident about having a financially independent retirement down the road.

  1. Gauge Your Risk Tolerance

Understanding how comfortable you are with investment risk can help you determine what kind of allocation strategy makes the most sense for you. Remember, over time, and as your life changes, so will your risk tolerance.

  1. Ask for Help

If you have questions about your retirement plan or are unsure of how to go about saving for retirement, ask for help. Your retirement plan advisor can help you evaluate your progress with your retirement goals, determine how much you should be saving and decide which investment choices are suitable for you.