If A Client is Considering Implementing A Student Loan HR Benefit
With a staggering $1.5 trillion dollars of student loan debt in the U.S. economy, companies are increasingly seeing their employees’ student loans as a workplace issue. In order to increase recruitment and retention, more and more companies are taking the leap into offering a student loan benefit through their human resources department.
If one of your corporate clients is beginning to consider a student loan HR benefit, what compliance issues do you need to know about?
In this article, we will cover the basic trends in student loan support at the corporate level, discuss the options that companies are considering, and identify legal and compliance issues you should be aware of if a corporate client is considering a student loan HR benefit for their employees.
Why would a corporate client offer a student loan HR benefit?
Student loan debt is now the second largest category of consumer debt in the United States — exceeding credit card and auto debt and second only to mortgages.
Approximately 60% of the workforce under the age of 40 left school with more than $10,000 in student debt. In tight talent markets such as healthcare and technology, even a higher percentage of the workforce now comes with student loan debt.
In the face of these staggering numbers, companies have begun to consider whether a student loan HR benefit could be an important tool in attracting and retaining talent. Companies who implement these programs hope to see a return on investment by keeping their employees for longer, decreasing turnover and decreasing training costs.
It seems the return on investment is making sense. Interest in these HR programs is picking up. In 2018 the Society for Human Resources Managers reported that 4% of companies were offering a student loan HR benefit. In 2019, that number doubled to 8%. Willis Towers Watsons, a leading international benefits firm, recently reported that student loan benefit adoption is expected to exceed 30% by 2022.
So when a corporate client is considering a student loan HR benefit, what exactly would that benefit look like?
What type of student loan HR Benefits are out there?
Student loan benefits are not one-size-fits-all. Indeed, there are a wide spectrum of programs that have been adopted by companies of all shapes and sizes. For the purposes of this article, we’ll summarize the dizzying array of options into three buckets: (1) refinance programs; (2) directed payment programs; and (3) 401(k) matching programs.
Refinance programs are designed to help employees save money by lowering their interest rate. More than 90% of all student loan debt is federal student loan debt, which often has interest rates between 5% and 7%. Private refinance companies offer lower interest rates to entice borrowers to refinance their federal loans into private loans.
Under a refinance program, companies enter into partnerships with these refinance companies to offer special rates to their employees.
By comparison, under directed payment programs, companies actually make monetary contributions to help pay off their employees’ student loans. These payments can be structured as a yearly or monthly payment and can be modulated based on employee seniority.
Finally, there are 401(k) matching programs — a category of student loan benefits almost single-handedly created by a biotechnology company in Illinois which received an IRS Private Letter Ruling approving their plan modifications in 2018.
We will take a deeper dive into each of these potential student loan HR benefits and flag the compliance issues you need to know for each one.
If your clients want to consider a refinance program, they will need to establish a partnership with a third-party refinance marketplace or refinance program.
Generally these programs are a relatively light lift for corporate clients, and have correspondingly simple compliance concerns.
The main issue is you may want to recommend avoiding co-branding the refinance program with your client’s own corporate information. The Federal Trade Commission recently settled a large complaint against SoFi, the most prominent student loan refinancer, alleging that SoFi misrepresented how much money student loan borrowers could save by refinancing with the company. The FTC sent notice letters to a number of other large refinancers regarding claims in their advertising material. Overall, the refinance industry is still re-adjusting after this recent decision.
While the FTC has not specifically gone after any companies that encouraged their employees to participate in these refinance programs, it may be advisable to avoid co-branding for the time being.
Directed Payment Programs
If your client is going to consider a directed payment, there are a few important legal issues to know about.
First, it’s worthwhile to consider a third-party administrator so that your client’s HR department is not themselves knowledgeable about an employee’s educational debt or personal finances.
Second, you should keep an eye on possible changes at the federal level that will create tax advantages for direct payment programs. Right now there is no tax benefit to directed payment onto an employee’s student loans. The payments are considered to be W2-reportable wages and are taxed accordingly.
However, the Employer Participation in Repayment Act (H.R. 1043, S. 460) is currently pending in Congress. The bill would expand the educational benefits under Section 127 of the Internal Revenue Code. Under that chapter, companies can spend up to $5,250 in tax-free dollars to support their employees’ tuition payments. The bill would expand Section 127 to allow tax-free dollars to be applied to student loans in addition to tuition.
The bill is sponsored by both Republicans and Democrats. Lead sponsor Senator Mark Warren has said that the bill would “modernize” the tax code to “help individuals pay down their student loans and serve as a recruitment and retention tool for younger employees who are typically not large consumers of health care, retirement, and insurance benefits.”
Be sure to check on the status of this legislation if advising on a directed payment program.
401(k) Matching Programs
Until recently, there was quite a bit of uncertainty about the interplay between a student loan repayment program and 401(k) contributions. However, the IRS recently issued a Private Letter Ruling that provided some much-needed guidance on the subject.
The PLR dealt with a program set up by Abbott Laboratories, a biotechnology company based in Illinois. After noticing that their younger employees were not meeting the company’s offered 401(k) match, Abbott Laboratories modified their 401(k) plan to help their younger employees save for retirement.
Under Abbott’s old plan, an employee who contributed 2% of her salary to the company’s 401(k) plan received a 5% matching contribution from the company. Under Abbott’s new program, an equivalent 2% payment towards an employee’s student loans would be sufficient to trigger the company’s 5% contribution towards the 401(k) plan, even if the employee never contributed a dime directly into the 401(k) plan itself.
The PLR approving this program has opened the possibility for additional companies to implement matching programs directed at student loans. But for risk-adverse clients who want more approval from the IRS, be sure to keep an eye on the Retirement Parity for Student Loans Act (S 3771), currently pending in the Senate. The bill would formalize the Abbott Laboratories model for other companies to copy.
Given the complexity of legal issues surrounding retirement plans, corporate clients may want to wait for additional federal guidance, either from the IRS or from Congress, before implementing a student loan benefit through their retirement plans. The Abbott Laboratories PLR may have opened new possibilities, but the PLR does not guarantee that another similar plan would be approved.
A few decades ago, nobody thought that employee health was the responsibility of employers or human resources departments. And yet, today competitive employers offer a suite of options to tackle employee emotional and physical health. We are seeing the same transition take place in student loans, with more and more employers realizing that tackling financial health means tackling student loans.
In the coming year, your corporate clients may consider implementing a student loan HR benefit. If they do, you’ll be ready to help.
Rebecca Maurer is an attorney who focuses on housing and consumer law, with a particular emphasis on student loan law. Rebecca is a graduate of the University of Chicago and Stanford Law School. She was previously an associate at Patterson Belknap Webb & Tyler, a law clerk to Judge James Gwin of the Federal District Court of the Northern District of Ohio, and a staff attorney at The Legal Aid Society of Cleveland. She currently runs Maurer Law LLC, a solo practice based in Cleveland. She has been a CMBA member since 2016. She can be reached at (216) 242-6672 or Rebecca@maurerlawllc.com. Follow her on Twitter @maurerlawllc.