The Retirement Parity for Student Loans Act

Student loan debt statistics for the U.S. in 2021 show that 45 million borrowers owe almost $1.7 trillion in debt related to higher education.[i] For people entering the workforce out of college or those otherwise trying to balance student loan debt with mortgage or rent payments, auto loans, credit cards, and other expenses, the desire to take advantage of employer-sponsored retirement plans may be at odds with the need to pay down outstanding student loan balances, even when directing money toward student loan payments means foregoing their employers’ matching contributions.

If passed in its current form, the Retirement Parity for Student Loans Act (the “Act”) could help alleviate that struggle.[ii]

HELPING WORKERS SAVE WHILE REDUCING OUTSTANDING DEBT

Originally introduced to Congress in 2019 and reintroduced in April 2021, the Act would allow employer-sponsored retirement plan matching contributions to workers based on employee student loan payments, as if those payments were instead employee salary reduction contributions to their 401(k), 403(b), SIMPLE, or governmental 457(b) plan accounts.[iii]

Essentially, if the Act is passed as written, employees whose companies opt in to the Act and who are paying down their student loans would continue doing so. These workers would then be eligible to receive employer matching retirement plan contributions based on the amount of their student loan payments actually made (as certified by each employee.) Participation for employers would be voluntary, not mandatory. However, an employer that makes the benefit available would be required to offer it to all employees who would otherwise be eligible for matching contributions.[iv]

The IRS, in a 2018 private letter ruling, stated that a 401(k) plan may include this type of student loan provision. However, a private letter ruling is specific to one set of facts and circumstances and is not necessarily applicable to all employers and all situations. If the pending legislation is ultimately passed, all employers offering retirement plans with matching contribution provisions would have the option of offering this type of benefit to workers.[v]

BIPARTISAN SUPPORT TO HELP ALLEVIATE STUDENT LOAN DEBT

There have been calls by some in Congress for student debt forgiveness of up to $50,000, although there is little indication that legislative action to do so would pass in both the House and Senate. President Biden has publicly stated that he will not forgive $50,000 in student loan debt through an Executive Order.[vi] This revived legislation addressing retirement plan contributions and student loan payments is sponsored by members of Congress in both major political parties, which could improve its chances of making it to President Biden’s desk for signature.[vii]

Besides bipartisan support in Congress, the American Retirement Association (ARA) has publicly supported the proposed bill. In its press release, the ARA noted that the bill’s text includes language addressing the nondiscrimination average deferral percentage test. These provisions should effectively alleviate potential concern that this benefit could negatively impact retirement plan testing for small business.[viii]

While it is not yet clear whether the Act will become law (or if so, how it may be amended), this is a potentially exciting development for employers of all sizes.

Important Disclosures:

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

[i]https://www.forbes.com/sites/zackfriedman/2021/02/20/student-loan-debt-statistics-in-2021-a-record-17-trillion/?sh=742f8d371431

[ii]https://www.congress.gov/bill/116th-congress/senate-bill/1428/all-info

[iii]https://lahood.house.gov/media-center/press-releases/reps-lahood-danny-davis-introduce-retirement-parity-student-loans-act

[iv]https://www.finance.senate.gov/imo/media/doc/Retirement%20Parity%20for%20Student%20Loans%20Act%20of%202021%20Summary.pdf

[v]https://www.napa-net.org/news-info/daily-news/irs-okays-amending-401k-plan-include-student-loan-benefit-program

[vi][vi] https://www.cnbc.com/2021/02/17/biden-says-he-will-not-support-50k-in-student-debt-forgiveness.html

[vii]https://www.pionline.com/legislation/bill-allowing-matching-retirement-plan-contributions-student-loan-payments-floated

[viii]https://www.napa-net.org/news-info/daily-news/ara-endorses-student-loan-debt-bill