Pub. 1 2019 Issue 3

23 nebraska society of cpas W W W . N E S C P A . O R G EMPLOYERS SHOULD CONSIDER A STUDENT LOAN REPAYMENT BENEFIT BY JOHN CEDERBERG, CPA The shortage of qualified employees in Nebraska has been receiving a great deal of publicity recently. For the past several years, hiring employees has been ranked as the most important problem facing members of the Nebraska Chamber of Commerce and Industry during its annual fall forums. OnMarch 31, 2019, the headline on the front page of the Sunday World-Herald proclaimed We have a workforce crisis’ in Nebraska” in an article written by Henry Cordes. When recruiting employees, Nebraska employers must offer not only competitive compensation, but also competitive employee fringe benefits. An emerging trend in employee benefit packages is employer payments on employees’ student loans. Last year, Forbes Magazine published an article by Zack Friedman titled “Student Loan Repayment Is the Hottest Employee Benefit of 2018” in which Friedman states: “Vacation time, 401k plans, and health insurance are great, butwhat recent graduates really want is help repaying their student loan debt.” The article lists 10 large national and international employers, including PriceWaterhouseCoopers, that have an employee fringe benefit involving employer assistancewith student loandebt repayments. Recent articles have also reported that Boone, Iowa-based, Fareway Stores Inc. has initiated a new program, Fareway Fast Forward,“intended to help alleviate financial stress associated with the repayment of student loans.” The program will reportedly impact some 3,000 employees, with more than 118 stores in five states throughout the Midwest, including Nebraska. Unfortunately, straightforward employer payments on employees’ student loans has no practical economic benefit to the employee, or less cost to the employer, than simply increasing compensation by a comparable amount. The employer’s loan payments are taxable compensation income to the employee, subject to federal and state income tax withholding, as well as both the employer’s and employee’s shares of FICA and Medicare taxes. Last year, Abbott Park, Ill.-based, Abbott Laboratories announced a fascinating new approach to assist their employees in paying down student loans. The company’s approach has a real, practical economic benefit to the employee at less net cost to the employer. Most companies with “Section 401(k)” defined contribution retirement plans provide some element of “matching contributions” to their employees’ retirement accounts based on the employee’s individual contribution of compensation to the plan. The problem for young people with student loan debt is the difficulty of simultaneously deferring compensation into the qualified 401(k) plan and repaying their student loans. The Center for Retirement Research at Boston College has found that college graduates with student debt accumulate 50 percent less retirement wealth in their 401(k) accounts by age 30 than those without student loan debt. This is really important because these are “defined contribution” plans, and early contributions have longer to grow inside the plan to support an adequate retirement income. Abbott Labs developed a plan where Abbott will make a matching contribution to the 401(k) plan for a participating employee’s student loan payments. For example, an employee who pays 2 percent of income toward student loan debt will earn a 5 percent match from Abbott to the employee’s 401(k) plan account. Abbott obtained a favorable private letter ruling from the Internal Revenue Service that matching employees’ student loan payments did not somehow disqualify their qualified plan. (PLR 201833012, datedMay 22, 2018. Access the PLR at https://www. irs.gov/pub/irs-wd/201833012.pdf) This is ingenious. $ It does not require any federal or state legislation. $ Any employer with a 401(k) plan can do it. It would be prudent to have professional assistance to make sure that the plan complies with all of the many rules associated with qualified retirement plans, and follows the facts in the Abbott Labs private letter ruling. It may also be prudent for employers to obtain their own private letter rulings from the IRS until the IRS issues a published Revenue Ruling, or at least has issued several more private letter rulings to other employers. However, it is literally available to any employer who has a qualified defined contribution retirement plan with a 401(k) feature. $ It simultaneously addresses both the employee’s student loan debt and the employee’s ability to participate in the Section 401(k) matching program that is available to employees generally. The employee will still accumulate less in the 401(k) plan than if he/she contributed to the plan to earn the employer match, but at least the employer match is not lost. $ The cost to the employer is essentially l imit ed t o t he emp loye r ma t ch resulting from an increase in employee participation in the 401(k) feature of the retirement plan. Compensation expense and the cash cost to the employer for the matched amount that the employee uses to pay on student debt is the same whether the employee