It's important to save for retirement. But when you have a big load of student loan debt hanging over you, it's hard to find the cash both to make your loan payments and to contribute to a retirement plan.

That's why one employer is looking at a novel way to help employees build up retirement savings even if they have large student loan balances. By linking matching 401(k) contributions to the amounts that workers repay on their student loans, this employer wants to help workers build up a retirement savings balance as early as possible -- and the legal advisors who helped set up the system and got it approved by the IRS hope that other employers will follow suit.

Three golden eggs in a basket of dollar bills, with 401K written on one of the eggs.

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What does student loan debt have to do with 401(k) plans?

Lawyers at McDermott Will & Emery LLP were faced with a conundrum: how to enable employers to help out workers making student loan repayments. Many companies help out their employees by making matching contributions to 401(k) plans when their employees contribute a portion of their own paychecks to their retirement accounts. But what those employers had found was that those still struggling with student loan debt -- especially younger workers -- weren't participating in their 401(k) plans to the same degree as those who had more disposable income available.

McDermott came up with a creative approach. In 2017, the law firm submitted a request for a private letter ruling from the IRS approving what it called a student loan benefit program. Under the terms of this program, workers could choose voluntarily to participate simply by enrolling and then making student loan repayments. Under the particular employer's matching provisions, if an employee took at least 2% of their compensation for each pay period and used it to repay student loan debt, then the employer would contribute 5% into the worker's 401(k) plan -- the same matching provision as this particular plan had for retirement plan contributions.

At first, some legal experts were skeptical about whether such a provision would be allowed under the laws governing employer-sponsored retirement plans. The problem was that unlike with the contributions that workers made directly into their 401(k) accounts, the student loan repayments happened outside the retirement plan.

However, in August, the IRS issued the private letter ruling approving the company's request. The ruling said the arrangement could work in essentially the same way as regular employer matching provisions in a 401(k).

Will other employers follow suit?

IRS private letter rulings are specifically addressed to the taxpayer making the request, so other employers aren't allowed to rely on this ruling to set up similar plans. However, following the IRS decision, an advocacy group for employee benefits sent a letter to the IRS asking it to issue a revenue ruling on which all employers could rely. As a spokesperson for the ERISA Industry Committee said, "More employers would be encouraged to implement retirement savings programs to assist individuals who are repaying student loans similar to the one described in the [private letter ruling] if the IRS would issue a revenue ruling or other guidance of similar applicability on this issue."

If student loan benefit programs become more popular, it could address a growing problem among young workers. Those who have extensive student loan debt face a huge hurdle toward saving for retirement, and the delay that many face in starting to set aside money for the future can cut the size of their eventual nest eggs in half, according to research from Boston College's Center for Retirement Research.

Be smart with your savings

If you have student loan debt, then finding the right balance between paying down your loans and saving for retirement can be tough. Hopefully, more employers will look to offer student loan benefit programs to help prevent their workers from falling behind with their retirement saving just because of their debt obligations. Until they do, you'll face the tougher job of handling your debt without sabotaging your long-term future.

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