A desire to help young employees pay off their student debt has prompted some Pennsylvania companies to try offering help as a benefit, but many are finding that it may be more trouble than it’s worth.
Last year, Chicago-based pharmaceutical company, Abbott Laboratories, began offering its employees a 5% contribution to their 401(k) accounts if they pay a minimum of 2% of their paycheck towards their student loans.
Pennsylvania businesses took notice and saw it as a chance to help their employees and attract new workers.
Conrad Siegel, a financial consultant in Harrisburg, began receiving questions soon after Abbott received a private letter ruling from the Internal Revenue Service that allowed the company to offer the benefit.
“(The private letter) was really the genesis of it,” said Tom Reese, partner and consulting actuary with Conrad Siegel. “Once I started to have conversations with my clients about the benefit, I was overwhelmed by how important this issue was to our clients in so many industries.”
Pennsylvania residents owe approximately $58.7 billion in student loans and the average student borrower owes $33,935, according to a report by Business Insider in August that used data from the U.S. Department of Education’s Office for Federal Student Aid.
Student debt has been a hot topic in recent years and Siegel’s clients see the benefit not only as a way to ease the burden, but to attract and retain talented employees, said Reese.
Walnut Creek, California-based CSAA Insurance Group allows employees to divert up to 4% of their employer-matched 401(k) benefit to pay down their student debt if they contribute at least 2% of their salaries toward their retirement plan.
While Conrad Siegel continues to take questions about how companies could use these methods in their own plans, the firm has yet to see one of its clients offer such a benefit as all the available methods have a number of hurdles to cross. The Abbott method is too specific to be used by a company without spending thousands of dollars to receive a similar ruling from the IRS, said Scott Gehman, a retirement plan consultant for Conrad Siegel.
“Abbott Labs paid a lot of money for the IRS to rule on their case,” Gehman said. “Another plan sponsor could come along and if they duplicate what Abbott Labs is doing, they should be alright but the intent of a private letter ruling is that it only gives Abbott a pass. That’s a lot of money to pay so my clients have adopted a wait and see approach.”
Because the CSAA method did not use a private letter ruling from the IRS to create its benefit, the method costs much cheaper to start. However, Conrad Siegel’s consultants said that the downside to the plan is that the payments are taxable to the employee.
“We haven’t found a silver bullet,” Gehman said. “We’ve had clients that have asked a lot of questions and try to use the best of both programs but we haven’t come up with a solution as of yet.”
Currently, legislation on a federal level seems to be the best method that would allow for companies to offer the benefit without utilizing the current loopholes. Reese said he hopes to see a bill pass in Washington that would allow for more businesses to use a method similar to what Abbott and CSAA created.
“I think we will see something in Washington that will address this to make it easier for employers to address this debt,” he said. “Something that sets the contribution amounts employers will make and that will be tax-free to employees.”
In the meantime, Reese suggests that his clients look at refinancing their employee’s debt. He said that refinancing offers the lowest cost to employers but allows them to reduce an employee’s interest rate on their loans.
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