Initiating a Student Loan Repayment Program to Compete for Recent Graduates

It is no secret that the success of a company is largely determined by its workforce. Because recent graduates are facing record amounts of student loan debt upon graduation, some employers are implementing new strategies to attract elite talent by easing this financial burden. Several companies have started student loan programs that provide contributions to employees that are paying off student loan debt, but these “programs” are essentially additional employee compensation, and are treated as such for both the employer and employee. But a different strategy has been recently implemented by one company that allows employees to focus on reducing their student loan debt and at the same time taking steps towards saving for retirement, but is more cost effective for the employer than offering additional compensation.

The IRS has given its blessing on a student loan repayment program that will amend the employer’s 401(k) plan. The employer currently contributes a matching contribution to its 401(k) plan equal to 5% of the employee’s eligible compensation if the employee made an elective deferral equal to 2% of compensation. Under the student loan repayment program, the employee may elect to receive a nonelective contribution of 5% of compensation at the end of the year if the employee makes a student loan repayment equal to 2% of the employee’s salary per pay period. The nonelective contribution would be in lieu of the 401(k) matching contribution, but does not affect the employee’s ability to make elective deferrals. The program has a mechanism for the plan to make matching contributions if the student loan repayment program was elected, but the employee made elective deferrals without making any loan repayments during a pay period.

The program serves as a win-win for both employers and employees. Employers can attract and retain talent by offering this program, and the program is less costly than a student loan repayment program that is equivalent to a raise in compensation. And employees that are facing large amounts of student loan debt don’t have to choose between paying off debt today only to sacrifice saving for tomorrow.

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