Student loans are a burden that many college graduates carry with them into their professional lives. And their confidence in being able to pay off those loans quickly is low, as 60% of borrowers younger than 35 expect to still be paying off their debt in their 40s.
Thus, many employers are developing ways to incorporate debt assistance programs in their benefits offerings to attract talent. Abbott, a health-care company based in suburban Chicago, has instituted a new, inventive program to assist debt-saddled employees.
Mary Moreland, vice president of compensation and benefits at Abbott, explained during a presentation for the American Benefits Council that recent graduates entering the workforce with tremendous debt are at a significant disadvantage when it comes to saving for retirement. Moreland noted that Millennials who start their careers facing the repayment of a $30,000 student loan debt could wind up accumulating $325,000 less in retirement savings than their debt-free peers.
To help solve both issues, Abbott instituted the “Freedom 2 Save Program,” which allows employees to pay off student loans while still obtaining a typical 401(k) match. The program dictates that if an Abbott employee puts at least 2% of pay toward student loans, the company will put 5% of their pay into a 401(k) account.
“What we’ve done here is we’ve increased the flexibility of how to obtain that 5% in the 401(k),” Moreland said. “We’re not paying anyone differently. Everyone has the ability to obtain that 5% contribution, it’s just a question of how you get there.”
Moreland said the company looked at a direct pay option where employees could pay off debt through Abbott, but said they ran into obstacles that had them seeking a better alternative.
“We wanted something that was tax advantaged,” Moreland said of the direct pay idea. “And we wanted something that created a significant impact over the course of their career.”
Abbott was able to make the program work by hiring a third party that handles the enrollment. The third party takes the enrollment from the employee, the employee submits the information regarding the loan up front to enroll, which stops their contributions to the 401(k) if they were already contributing. Each month they submit information related to their student loan payments to the third party. The third party records the amount of those payments and the dates. At the end of the year, Abbott looks at those payments and the dates to see if the employee paid 2% to the student loan. Thus, the program is designed as an end-of-year contribution rather than by pay period. And if an employee doesn’t meet the 2% requirement for the full year, but does for a particular month or pay period, Abbott gives that worker the 5% for that month or pay period.
Moreland said that Abbott expects to have about 2,500 to 3,000 participants at full enrollment and noted its 401(k) enrollment is around 90%.
Caveat Emptor: Some Plans May Run Afoul
Kent Mason, a partner at Davis and Harman LLP, followed Moreland’s presentation by providing some legal insight and warnings for those hoping to adopt a plan similar to Abbott’s.
“Not everyone’s going to be able to do it, because of the way their plan works,” Mason said. “The way their demographics are, it fits this very well, but in other situations it won’t.”
Mason presented an example of a plan that might match 50 cents on the dollar on elective contributions up to 6% of an employee’s pay. So, if an employee earns $50,000 and makes annual student loan repayments of $2,000, the employee would receive “matching” contributions in the plan equal to 50%. Technically under law, Mason said, that $1,000 contribution is not a matching contribution, but rather is a “nonelective” contribution that is tested separately from the matching contributions provided to other employees who are not making student loan repayments.
Therefore, if the group of employees receiving such nonelective contributions is too disproportionately highly compensated, this group is tested separately and can fail the coverage tests under Code section 410(b). A company needs to avoid the Business Rule Framework (BRF) issue by treating nonelective contributions exactly like matching contributions.
Employers also have to be wary of a discrimination issue.
“Even if the group receiving nonelective contributions satisfies the coverage tests, the contributions can fail the nondiscrimination rules if, for example, the employees with higher student loan repayment amounts are too disproportionately highly compensated,” Mason said.
There also is the contingent benefit rule to consider, which says an organization can’t make any benefit, other than a matching contribution, contingent on an employee making or not making a 401(k) contribution. Meaning, a company couldn’t tell an employee that it will help repay the loan if the worker makes a 401(k) contribution because that is a benefit other than a match, which is contingent upon making a 401(k) contribution.
Ultimately, Mason emphasized the importance of vetting whatever program an employer is attempting to install because it is easy to run afoul with the various nondiscrimination rules.
About the Author
Brett Christie is a staff writer at WorldatWork.