IRS Helps Company Differentiate on Benefits

September 10, 2018 — Companies try a lot of different strategies to recruit and retain talent. Given lower participation in retirement savings plans among their younger generations of staff, one company took action. As a result, the IRS seems open to allowing employers to help out by contributing to employee 401(k) plans even if they aren’t regularly allocating funds there themselves.

While the company’s name was redacted by the IRS, we do know how it works. The company was already providing a 5% 401k match toward as little as a 2% employee contribution but realized that not all employees were able to make one. The reason is that some employees—and especially some Millennials—have to use part of their pay toward unsecured student loan debt.

If the IRS’s recent August 17^th decision (i.e. public release of Private Letter Ruling 201833012 dated May 22, 2018) is made available across the board, money that companies are direct depositing toward the repayment of student loan debt could be rewarded with an employer non-elective contribution.

How Does the Program Work?

Under the Private Letter ruling and this specific Student Loan Repayment (SLR) non-elective contribution program, if an employee makes either:

• A student loan repayment of at least 2% of their eligible compensation during that period; or
• An elective 401(k) contribution of at least 2% of their eligible compensation during that period,

The employer will contribute 5% to the employee’s 401k plan as an employer non-elective contribution or an employer matching contribution depending on the employee’s election.

This could help ensure that employees’ long-term financial health increases. If it were adopted widely, it could move the needle on participation in 401(k) plans. Pew found that there is just 52% participation for Millennials as compared to 75% of Generation X and 80% of Boomers (with the Millennial subset drawing only from those age 22 and over to exclude those likely still in school).

Factors they point to for lower participation among Millennials include the lower wages commanded by one when at an earlier point in their career coupled with unsecured loan debt from student loans.

What Are Employees Looking for in a 401k Plan?

Employees like to see at least some of the following things with regard to 401k plan features:

• Immediate entry to plans upon hire;
• Immediate vesting of contributions;
• The option to do Pre-tax and/or Roth contributions;
• Matching or some type of an employer contribution; and
• A good array of investments that are low-cost, with good communication from the plan’s financial representative (i.e. through participant meetings and informative correspondence).

The above features require careful consideration by employers when putting a plan/benefits in place. Redpath and Company, Ltd. can help a business determine the best options. You can get in touch with Christine Bentson at Redpath and Company at cbentson@redpathcpas.com or (651) 407-5808.