Employers may soon be able to offer student loan payments in lieu of matching 401(k) contributions.

A company asked the Internal Revenue Service (IRS) if it could amend its 401(k) program to offer a student loan benefit program. In lieu of making a matching contribution to a participating employee’s retirement savings, the employer would make a student loan repayment (SLR) contribution. The SLR contribution would be in an amount proportionate to the matching contribution the employee would otherwise receive.

In a private letter ruling, the IRS approved the company’s proposal. The proposed program was found not to violate the “contingent benefit” prohibition clause included in the section of the tax code governing 401(k) plans. This prohibition prevents employers from offering other benefits besides a matching contribution based on an employee making elective (voluntary for their benefit) contributions to a 401(k) plan.

The IRS noted specifically that the ruling was “directed only to the taxpayer requesting it.” Citing the tax code, the IRS further said the ruling “may not be used or cited as precedent.” Nonetheless, the ruling was viewed as creating a pathway for other employers to follow.

The Chicago Tribune identified the company requesting the approval as Abbott Laboratories. The newspaper further said that the ERISA Industry Committee—an advocacy group for large employers—has requested that the IRS make the guidance more generally applicable.

Even if such guidance is given, the design of each 401(k) could be a hurdle. Documentation may need to be revised or rewritten and both administrative costs and logistical issues would need to be addressed.

For employees with student loan debt, calculations will need to be run. While diverting matching contributions to student loans will help to retire the debt sooner, it comes at the cost of forfeited gains that could have been realized by boosting retirement savings earlier in a career rather than later. For those with lower salaries and high student debt, paying down the debt more aggressively could make sense given the relatively small absolute size of the contributions. For those with higher incomes, a comparison between potential returns and interest paid on the loans will need to be calculated.

Source: Internal Revenue Service Private Letter Ruling 201833012, August 17, 2018; “Abbott 401(k) program to help employees who have student debt could become national model,” Chicago Tribune, August 31, 2018.