It probably beats outright student loan forgiveness, but is the 401k moving away from its intended purpose?
Senate Finance Committee Ranking Member Ron Wyden, D-Ore., introduced legislation on Tuesday to give workers the flexibility to save for retirement while having enough money to make their student loan repayments.
Wyden’s introduction is in preparation for next year, when broader conversations on retirement security are expected in the new Congress.
Wyden’s bill, the “Retirement Parity for Student Loans Act,” allows employers to make matching contributions to a 401k retirement plan while their employees make student loan repayments.
Under this proposal, recent graduates who cannot afford to save money above their student loan repayments would no longer have to forego the employer match.
“Millions of new college grads are buried under tens of thousands of dollars in student loan debt,” Wyden said in a statement. “Paying down student loans shouldn’t mean employees lose out on the opportunity to save for the future. Tax incentives for retirement savings must be designed to help workers build a nest egg, and that’s exactly what my legislation does.”
According to the Employee Benefit Research Institute, households headed by a person age 35 or less with a college degree and no student loan debt report median defined contribution account balances of $20,000—compared to $13,000 for similar families that have student loan debt.
How would it work?
It’s a voluntary benefit that employers may elect to provide to workers. It’s not a mandatory requirement for 401k, 403b, and SIMPLE retirement plans.
If an employer chooses to offer this benefit, then it must be made available to all workers who are eligible to make salary reduction contributions to the retirement plan and receive matching contributions on those salary reduction contributions.
It cannot be provided to workers who are not eligible to participate in the retirement plan.
The benefit only applies to repayments of student loan debt that was incurred by a worker for higher education expenses.
Additionally, it’s only available to employees who provide evidence to their employer of their student loan debt payments. Treasury would be authorized to issue regulations prescribing the conditions under which employers may rely on evidence of student loan debt submitted by workers.
The rate of matching for student loans and for salary reduction contributions must be the same.
For example, if a 401k plan provides a 100 percent matching contribution on the first 5 percent of salary reduction contributions made by a worker, then a 100 percent matching contribution must be made for student loan repayments equal to 5 percent of the worker’s pay.
Special rules apply if a worker makes both salary reduction contributions and student loan repayments.
Under those rules, student loan repayments are only considered to the extent that the workers have not made the maximum annual contribution to the retirement plan—for example, the annual maximum contribution limit per worker is generally $19,000 for 2019.
The bill also provides clarification on certain nondiscrimination rules that apply to 401k plans.
These rules restrict the extent to which a retirement plan can benefit highly compensated workers as compared to non-highly compensated workers, and contain safe harbors that deem the nondiscrimination rules are satisfied if certain matching or other employer contributions are made to the plan. The bill clarifies that matching on student loan payments does not violate these safe harbors.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
