Something
caught my eye recently about student loans. A 401(k) is involved, so there is a
tax angle.
Abbott
Laboratories is using their “Freedom 2 Save” program to:
… enable full-time and part-time employees who qualify for
the company's 401(k) – and who are also contributing 2 percent of their
eligible pay toward student loans – to receive an amount equivalent to the
company's traditional 5 percent "match" deposited into their 401(k)
plans. Program recipients will receive the match without requiring any 401(k)
contribution of their own.”
Abbott will put
money into an employee’s 401(k), even if the employee is not himself/herself contributing.
As I
understand it, the easiest way to substantiate that one’s student loan is 2% or
more of one’s eligible pay is to allow Abbott to withhold and remit the monthly
loan amount. For that modest disclosure of personal information, one receives a
5% employer “match” contribution.
I get it. It
can be difficult to simultaneously service one’s student loan and save for
retirement.
Let’s take
this moment to discuss the three main ways to fund a 401(k) account.
(1) What you contribute. Let’s say that you set
aside 6% of your pay.
(2) What your employer is committed to
contributing. In this example, say that the company matches the first 4% and
then ½ of the next 2%. This is called the “match,” and in this example it would
be 5%.
(3) A discretionary company contribution. Perhaps your
employer had an excellent year and wants to throw a few extra dollars into the
kitty. Do not be skeptical: I have seen it happen. Not with my own 401(k), mind
you (I am a career CPA, and CPA firms are notorious), but by a client.
Abbott is
not the first, by the way. Prudential Retirement did something similar in 2016.
The reason
we are talking about this is that the IRS recently blessed one of these plans
in a Private Letter Ruling. A PLR is an IRS opinion requested by, and issued
to, a specific taxpayer. One generally has to write a check (the amount varies
depending upon the issue), but in return one receives some assurance from the
IRS on how a transaction is going to work-out taxwise. Depending upon, a PLR is
virtually required tax procedure. Consider certain corporate mergers or
reorganizations. There may be billions of dollars and millions of shareholders
involved. One gets a PLR – period – as the downside might be career-ending.
Tax and
retirement pros were (and are) concerned how plans like Abbott’s will pass the
“contingent benefits” prohibition. Under this rule, a company cannot make other
employee benefits – say health insurance – contingent on an employee making
elective deferrals into the company’s 401(k) plan.
The IRS
decided that the prohibition did not apply as the employees were not
contributing to the 401(k) plan. The employer was. The employees were just paying
their student loans.
By the way, Abbott
Laboratories has subsequently confirmed that it was they who requested and
received the PLR.
Technically,
a PLR is issued to a specific taxpayer and this one is good only for Abbott
Laboratories. Not surprisingly there are already calls to codify this tax result.
Once in the Code or Regulations, the result would be standardized and a conservative
employer would not feel compelled to obtain its own PLR.
I doubt you
and I will see this in our 401(k)s. This
strikes me as a “big company” thing, and a big company with a lot of younger
employees to boot.
Great
recruitment feature, though.
