Helping Employees with Student-Loan Debt

Student-loan debt has skyrocketed by 96 percent according to a Federal Reserve study. If you are one of the over 44 million individuals with student loan debt, and were not a 2019 Morehouse College graduate lucky enough to have your debt wiped clean by billionaire philanthropist Robert F. Smith, you probably have a keen interest in this topic.

Even employers are starting to look at their role in helping employees pay down their student-loan debt. Why? According to a Mercer survey conducted in 2017, approximately 5 percent of payroll may be lost to unproductive time due to financial stress, which equates to roughly $250 billion per year. Another source (AP-AOL Health Poll: Debt Stress: The Toll Owing Money Takes on the Body) finds that employees with financial stress have more health problems, including muscle tension, back pain, high blood pressure, and trouble sleeping. Some people are hit doubly hard with the stress of current student-loan debt preventing them from saving for retirement, creating the need to work longer. And this doesn’t only impact younger employees. Many mature employees are incurring debt by helping their children pay for college or paying to enhance their own skills or to train for a new job.

Is this an opportunity for employers to stand out in the competition for talent? Yes. According to the 2019 SHRM Employee Benefit Survey, only 8 percent of companies offer some form of student-loan debt assistance. However, that is still double the number of companies from the prior year, suggesting employers are increasingly viewing debt management as a means for attracting and retaining talent. In another SHRM study, more than half of workers surveyed stated that student-loan repayment assistance would be a factor in evaluating new job opportunities. In fact, in a 2017 survey from American Student Assistance, 86 percent of respondents agreed with the statement, “I would commit to my employer for five years if they helped pay off my student loans.”

So what are the options? First, employers can look to their retirement plans. A 2018 IRS private letter ruling for Abbott Laboratories allowed a 401(k) plan-design option for participants to earn employer non-elective contributions instead of the employer’s matching contributions if the participants made minimum student-loan repayments. The plan design originally provided a 5 percent match when an employee contributed at least 2 percent of their compensation. However, employees with student-loan debt were reluctant to pay the 2 percent, and were therefore leaving the 5 percent employer match on the table. Abbott Laboratories proposed providing employees with the same 5 percent match to their 401(k) as long as the employee paid at least 2 percent of their compensation toward their student-loan debt.

This IRS ruling has sparked increased interest on behalf of employers to update their plan design to include a similar option for employees experiencing student-loan debt. Keep in mind, this private-letter ruling was at the request of Abbott Laboratories and their specific plan design. If this is something that has employees and leadership talking in your organization, proceed with caution. There are several compliance and administrative considerations before moving forward. For example, employers will need to take into consideration the contingent benefit rule (the rule that states a 401(k) plan is not qualified if the employer makes any other benefit contingent on whether an employee makes or does not make elective deferral contributions to the plan). Other considerations include non-discrimination testing, which student loans will be considered for the plan, how student-loan payments will be verified, who will administer the plan, etc. More IRS guidance in this area would be helpful.

Employers should also keep an eye on proposed legislation. Recently proposed legislation includes the Employer Participation in Repayment Act of 2019 (H.R 1043/S. 460), which would allow employers to contribute up to $5,250 tax-free to their employees’ student loans, and the Setting Every Community Up for Retirement Enhancement Act of 2019 (H.R. 1994), which proposes changes to retirement plans to make it easier for employees to contribute. Employers Council will alert you to any changes in this area.

Next, employers might want to look at expanding their wellness plans to include financial wellness. Many wellness programs are evolving to include not just physical wellness, but financial wellness, mental wellness, social wellness, etc. Plans are starting to view a person holistically, and financial stress can have a huge impact on someone’s overall well-being. Look at offering different programs for financial education including classes on how to create a budget and stick to it, debt restructuring, etc. Make financial advisers available for employees to have one-on-one conversations with regarding their personal financial needs. Offer online tools with financial aids, planners, and gamification options to get employees interested in their finances.

Another interesting option allows employees to exchange accrued, unused paid time off (PTO) for payment against their student loan debt. Unum will begin this practice in January 2020. They are calling it the Student Debt Relief Program, which will be managed by financial services provider Fidelity Investments. Unum’s current PTO benefit includes 28 days of paid time off in the first year of employment, which increases with years of service. The carry-over is currently set at up to five days or 40 hours. Beginning in January, employees who are in the Student Debt Relief Program will be allowed to convert up to 40 hours of any carry-over PTO into a payment for their student-loan debt. Make sure to consult your tax adviser before implementing to avoid any tax complications with this design.

Finally employers can look at helping with refinancing options for employees with student-loan debt. Companies, especially large companies, have more negotiating power with a bank or loan-refinancing firm to consolidate and refinance employees’ student-loan debt to a lower rate.

With many different approaches to help employees with student-loan debt, keep in mind that although many of your employees will be able to take advantage of benefits you offer in this area, this is not a benefit that will meet the needs of all your employees, which can bring up concerns that employers are only focusing on a specific employee population when rolling out a student-loan assistance program. Remember to analyze your current programs and find out what is working and what needs improvement. Talk to your employees to see if student-loan repayment assistance is even something they would perceive to be of value. When it comes to any type of new offering in your total rewards package, make sure it will meet the needs and wants of your current workforce as well as the company.