New bill links 401(k) matches to student loan payments

A bill introduced in the Senate would allow employers to pair workers’ student loan payments with 401(k) savings.

Ron Wyden, D-Ore., the ranking member on the Senate Finance Committee, sponsored legislation on Tuesday that would give plan sponsors the option of making a 401(k) matching contribution for employees who are paying back student loans.

Current rules, called contingent benefit rules, limit the ability of employers to link certain types of workplace benefits together, leading many plan sponsors to avoid adopting policies that pair student loans and retirement savings.

“There’s a lot of focus on it,” Will Hansen, senior vice president of retirement policy at the ERISA Industry Committee, an association for large plan sponsors, said of pairing retirement with student loans. “I think there will always be evolving benefits policies, and due to the student loan crisis in America, employers see this as a way to compete for the best talent.”

The U.S. has more than $1.4 trillion in student loan debt, which is spread among roughly 44 million Americans. Students who graduated from college last year had an average of $39,400 in student debt, according to Student Loan Hero.

Student debt is the second-largest household liability, behind mortgages, but ahead of auto loans and credit card debt, according to the Federal Reserve Bank of Minneapolis. Over the past 11 years, student loans have grown nearly 157% cumulatively, while auto loan debt grew 52% and credit card debt fell 1%, according to Bloomberg data.

Mr. Wyden’s bill, the Retirement Parity for Student Loans Act, would give retirement plan advisers more flexibility in how they work with employer clients to structure benefit programs, said David Levine, a principal at Groom Law Group.

The bill would allow workers who are paying down student loans to receive employer matching contributions into their 401(k) plans as if those student loan payments were salary reduction contributions made into the 401(k) plan. The legislation also applies to 403(b) and SIMPLE retirement plans.

For example, if a 401(k) plan offers a 100% matching contribution on the first 5% of pay, a 100% match would be made for student loan repayments equal to 5% of a worker’s pay.

The benefit would be voluntary for employers, apply only to​ higher education expenses and be available only to employees who provide evidence of student debt payments to their employers.

The legislation follows a private letter ruling issued by the Internal Revenue Service in August that approved a program offered by Abbott Laboratories, which sought to make nonelective 401(k) contributions (rather than a matching contribution) for employees making student loan payments. However, that private letter ruling doesn’t apply broadly — it only blesses Abbott’s program.

There are two schools of thought emerging about how to help graduates with student loan debt, Mr. Hansen said. The private letter ruling and Mr. Wyden’s bill help employees save for retirement while paying down their debt; another bill, the Employer Participation in Repayment Act, sponsored by Sens. Mark Warner, D-Va., and John Thune, R-S.D., would allow companies to use up to $5,250 of employees’ pretax income to pay down the employees’ student debt directly.

Fred Reish, a partner at law firm Drinker Biddle & Reath, said Mr. Wyden’s bill “has legs.”

“I doubt that this will go through as a stand-alone bill, but sooner or later it will be added to a major bill, perhaps a tax bill, and will become the law,” Mr. Reish said.

Mr. Wyden said he introduced the bill in preparation for next year, when it’s expected that Congress will have broader debates around improving retirement policy.