Repay Student Loans or Save in a Retirement Plan? Why Not Both?

Many employees feel squeezed to both pay off their debt and save for their future. A recent Private Letter Ruling (PLR) opens the door for employers to help them.

The average student graduating in 2016 has $37,172 in student loan debt.¹ According to the New York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000.

What do these numbers mean for you? They mean that debt repayment is typically an employee’s foremost priority. It’s not just the newly minted graduates, either – typically, student loan repayment is stretched over 10 years with close to an 11 percent default rate.

In this climate, don’t be surprised when a desired prospective or current employee inquires how you can help them with their priority – debt reduction. Nor should you be surprised when you find that your debt-burdened employees are not using the savings opportunity of their retirement plan. Many employees feel too squeezed to both pay off their debt and save for their future. Those employees are frustrated not only by their lack of opportunity to save early, as is prudent, but also because they frequently miss out on employer matching contributions in their retirement plans.

Some employers are attempting to solve these issues. On Aug. 17, 2018, the IRS issued PLR 201833012. The PLR addressed an individual plan sponsor’s desire to amend its retirement plan to include a program for employees making student loan repayments. The form of this benefit would be an employer non-elective contribution (a student loan repayment contribution, or “SLR contribution”).

The design of the plan in the PLR would provide matching contributions made available to participants equal to 5 percent of compensation for 2 percent of compensation deferred, it includes a true-up. Alternatively, employees could receive up to 5 percent of compensation in an SLR contribution in the retirement plan for every 2 percent of student loan repayments they made during the year. The SLR contribution would be calculated at year-end. The PLR states that the program would allow a participant to both defer into the retirement plan and make a student loan repayment at the same time, but they would only receive either the match or the SLR contribution and not both for the same pay period. Employees who enroll in the student loan repayment program and later opt out without hitting the 2 percent threshold necessary for an SLR contribution would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.

The PLR asked the IRS to rule that such design would not violate the “contingent benefit” prohibition under the Tax Code. The Code and regulations essentially state that a cash or deferred arrangement does not violate the contingent benefit prohibition if no other benefit is conditioned upon the employee’s election to make elective contributions under the arrangement. The IRS ruled that the proposed design does not violate the contingent benefit prohibition.

All that said, it is important to note that a PLR is directed to a specific taxpayer requesting the ruling, and is applicable only to the specific taxpayer requesting the ruling, and only to the specific set of facts and circumstances included in the request. That means others cannot rely on the PLR as precedent. It is neither a regulation nor even formal guidance. However, it does provide insight into how the IRS views certain arrangements. Thus, other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they will not run afoul of the contingent benefit prohibition.

Companies are increasingly aware of the heavy student debt carried by their employees, and are exploring a myriad of programs they can offer to alleviate this burden. This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the retirement plan at the same time the ability to avoid missing out on the “free money” being offered by their employer in the retirement plan (by essentially replacing the match they miss by not deferring with the SLR contribution they receive for participating in the student loan repayment program). This design is not meant to help employees accelerate their debt payoff. If that’s your goal, you would have to do so directly into the student loan repayment program – there is no conduit to do so through the retirement plan.

While the IRS ruled in regard to the contingent benefit prohibition, the PLR states definitively that all other qualification rules (testing, coverage, etc.) would remain operative. Thus, if you wish to pursue adding such provisions to your retirement plan, you must take care as you undertake the design.

The facts provided in the PLR were very basic, and the plan design is very basic in that it requires deferral/student loan repayment equal to 2 percent for a 5 percent employer contribution (either match or SLR contribution) with no gradations. This is important because gradations could create separate testing populations for each increment of the SLR contribution plan, since it is a non-elective contribution, not a matching contribution. This could become a nightmare scenario for non-discrimination testing and administration.

Alternatively, to avoid the potential nondiscrimination testing issues, the benefit could be designed to exclude highly compensated employees. However, that still doesn’t alleviate the potential administrative burden placed on your payroll and human resources teams. Most of the debt repayment programs are not yet integrated with retirement plan recordkeepers. That means that administering some of the interrelated elements of the two plans would have to be undertaken in-house.

There are more than a few consequential elements that you should be wary of while exploring opportunities to assist your employees and employment targets. In all cases it is recommended that you involve your retirement plan’s recordkeeper, advisor and even – in some sophisticated design scenarios – outside counsel to make certain they: (1) don’t inadvertently create qualification issues, (2) understand the potential for additional testing and perhaps additional financial considerations of the design; and (3) are prepared for any additional administration the program may require.

This month’s employee memo gives ideas for eliminating student loan debt. Even if you are not yet offering this benefit, the memo offers other practical ideas to assist your employee population with student loan debt.


About the Author, Joel Shaprio, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.


Fiduciary duty requires you to provide your employees and participants with educational opportunities so they can make informed investment decisions.  It’s not always easy to know what your participants need, want or will take advantage of.  Using a simple framework for your educational program may increase the effectiveness of your program.


  1. Provide a consistent, ongoing program using a variety of communication mediums. This can include group meetings, podcasts, online tools, one-on-one meetings or other mediums attractive to your participants. 
  2. Vary the content of your program to provide broad education. Content should include plan basics, such as Basic Investing/Getting Started, but may also include topics related to a participant’s entire financial picture – e.g., Saving for College, Estimating Retirement Income Sources and Needs, Health Care Options – and other topics of consideration to a retiree’s financial well-being.  
  3. Offer online and professional advice tools to help retirees determine how much they need to save and how they will invest their contributions.
  4. Fully disclose to participants, in easily understandable terms, information about the fees associated with their different investment options.
  5. Offer participants opportunities to discuss their risk tolerance level, and help them understand how much risk they are willing to take when investing for their retirement.
  6. Consider allowing employees to take advantage of educational opportunities and/or one-on-one meetings during working hours. This helps send a message to employees that their employer values this important benefit and is interested in helping employees prepare for their future.
  7. Survey employees to determine if they find the educational program valuable, are taking advantage of it, what would make it more attractive and other feedback they may have to help continuously improve the program.


Every plan and its participant base is different, and there is no one right structure for an educational program. By starting with the above and being willing to modify your program’s offerings according to participant feedback, your educational program will get stronger, you will meet this responsibility and you may even see employee engagement increase!



Welcome to Hey Joel! This forum answers plan sponsor questions from all over the country by our in-house former practicing ERISA attorney.

Hey Joel,

What are the risks for late 5500 filings? – Tardy in Tallahassee


Dear Tardy,

The main risk is the daily penalties that accrue from the IRS and DOL for each day the filing is not submitted past the deadline. There is a process you can go through that reduces the amount of daily penalties, but there is a filing charge associated with this process as well.

The DOL has a good Q&A document about the program for correcting a late filing: Some of the penalty dollar amounts may have changed since this was published as they are adjusted on occasion.


Punctual and proud,

Joel Shapiro


About Joel Shapiro, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.


This month’s employee flyer gives participants ideas to assist in eliminating student loan debt. Download the flyer from your Fiduciary Briefcase at and distribute to your participants. Please see an excerpt on the next page.

If you find yourself in a position of not being able to pay off your student loan debt and save for your future, you’re not alone. According to the New York Federal Reserve, more than two million student loan borrowers have student loan debt greater than $100,000, with approximately 415,000 of them carrying student loan debt in excess of $200,000. Here are some steps you can take to help eliminate your student loan debt:


  1. Make a Budget

Do you have a budget that you’re following each month? If not, create one today! With a monthly budget you can track where you are spending your money and where you can cut back. Then take your savings and put it towards your student loans!


  1. Pay More Than the Minimum 

It’s no secret that paying the minimum each month will not

get you far. By paying more than the minimum you can attack the principal at a quicker rate. Then your loans will be paid off faster.


  1. Apply Raises and Tax Refunds to Your Student Loans

When you get some extra dough from a raise or tax refund it may be tempting to run out and spend it. Wouldn’t it be so much more beneficial to put any extra money you receive towards your debt? Doing this will get you to your goal of being debt-free much quicker.


  1. Find Out if Your Employer Offers a Student Loan Repayment Program

Last year the IRS issued a Private Letter Ruling stating that companies offering a retirement plan can amend their plan to include a program for employees making student loan repayments. Under this program, employers make retirement plan contributions into the accounts of employees who are making student loan repayments.



Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.



This past November, the IRS issued proposed regulations to effectuate changes made for hardship withdrawals in the Bipartisan Budget Act of 2018. Comments were due by Jan. 14, 2019. Although the statutory changes are effective beginning in 2019, the proposed regulations do not require any changes in how hardships are administered until 2020.

Plan documents must be amended to reflect changes to the safe harbor rules. Most recordkeepers updated their systems so participants are no longer suspended from making contributions following a hardship distribution, but they have not set a time frame for when plan sponsors can expect to receive the necessary amendments. The deadline for amendments will be the end of the second calendar year beginning after the hardship changes appear on the IRS’ Required Amendments List. The proposed regulations include some changes that go beyond what is required to conform to the statutory changes. While the changes generally make hardship distributions more accessible, the IRS makes it clear that plan sponsors are free to add their own restrictions, such as limiting the sources eligible for hardship distributions.

Current Law

Prior to age 59½, in-service distribution of elective deferrals is limited to certain events including hardship. A distribution qualifies as a hardship only if made on account of an “immediate and heavy financial need.” The amount distributed cannot exceed the amount necessary to satisfy this need. The determination of whether the participant has “an immediate and heavy financial need” must be based on “all relevant facts and circumstances.” A distribution is considered necessary to meet “an immediate and heavy financial need” only if other resources are not available to the participant. Plan sponsors may accept a participant’s representation that he/she has no alternative resources, unless the sponsor has actual knowledge to the contrary. Certain sources are not eligible for hardship distributions – post 1988 earnings, safe harbor contributions, QNECs and QMACs.

Existing Safe Harbor Rules

Although not a legal requirement, the majority of plan sponsors follow the safe harbors. If a plan sponsor follows the safe harbor rules, the IRS will not challenge hardships on audit. These rules are included in virtually all prototype and volume submitter documents. There are two aspects to the safe harbor rules:

  • First, six events are deemed to qualify as “an immediate and heavy financial need:” (1) deductible medical expenses; (2) costs associated with purchase of a principal residence: (3) tuition and other expenses associated with post-secondary education; (4) payments to prevent eviction; (5) funeral expenses and (6) deductible expenses associated with repairing damage to a participant’s principal residence if deductible as a casualty loss.
  • Second, a distribution is deemed necessary to satisfy the immediate and heavy financial need if the participant has taken all other available plan distributions, including loans, and the participant is suspended from contributing for six months.

What Has Changed

  • The six-month suspension of contributions is eliminated (optional for 2019).
  • The requirement to take a loan first is now optional.
  • Except for 403(b) plans, all account sources are now eligible for hardships, but sponsors may elect to limit the sources eligible.
  • Earnings remain ineligible for all 403(b) plans, along with QNECs and QMACs in custodial accounts.
  • Casualty losses related to home repairs are now deductible only if the taxpayer resides in an area declared to be a federal disaster. The proposed regulation clarifies that a participant is eligible for a hardship distribution for such losses whether or not a federal disaster is declared.
  • All expenses related to an event declared by FEMA to be a federal disaster qualify for hardship if the participant resides in or works in the disaster area.
  • Expenses incurred by the primary beneficiary that are qualifying medical, education or funeral expenses are eligible for a hardship distribution. Under prior law, this was limited to the participant, spouses and dependents.

The “all relevant facts and circumstances” evidentiary standard no longer applies. The participant must first take any available distributions under all plans of the sponsor. This includes non-qualified plans. And, beginning in 2020, the participant must represent in writing (or by electronic medium) that he/she has no other available resources to satisfy the need. The sponsor may accept this representation unless it has actual knowledge to the contrary


Municipal bond holders may not appreciate the risks they are undertaking. Municipal bonds have always been viewed as an ultra-safe investment. However, in recent years a number of pundits have predicted widespread defaults on these bonds precipitated by growing unfunded state and local pension liabilities. With some exceptions (Detroit, Puerto Rice and Stockton, CA), these predictions have not come to pass. Investors have given little heed to these warnings.  Ratings agencies and fund managers in this sleepy sector continue to operate on the assumption that things will somehow work out.  The liabilities of state and local governments are now estimated at about $8 billion – half owed to bond holders and half to pensioners. Rising stock markets and low interest rates in recent years would seem to have been the perfect environment for state and local governments to improve the pension funding. However, things have continued to deteriorate making it more likely that predictions of widespread defaults may pan out. At the beginning of the financial crisis, according to the Pew Charitable Trust, state and city pension plans were on average 86 percent funded.  Unfunded liabilities have now grown to $1.4 trillion and just 66 percent are funded. This is based on states’ and cities’ own rosy assumptions that future returns on pension assets will on average equal 7.5 percent.  Decreasing this assumption by only one percent increases pension liabilities by about $400 billion. Using more realistic assumptions, the American Legislative Exchange Council estimated that the funding of Connecticut, Illinois and New Jersey, the three states with the biggest challenges, is only 19.7 percent, 23.3 percent and 25.7 percent respectively. Cities can cut back on services and take on more debt without bouncing checks to pensioners or bondholders. But rising interest rates, declining stock markets and/or a recession may be the tipping point. In the last recession, state revenues across the country declined on average by 8 percent. When crunch time comes, municipal bonders may be in for a shock. In those bankruptcies to date, pensioners have fared far better than bond holders. When the municipal bond market start to reflect the real risks, bond holders will be asking why no one saw this coming.


The Pension Benefit Guaranty Corporation (the PBGC) is a government insurance program that guarantees all private defined benefit pensions. There is no comparable insurance for defined contribution plans. The PBGC pays benefits to almost a million participants covered by 4,800 failed pension plans and is responsible for future payments to another half a million individuals. The PBGC faces an uncertain financial future and its challenges continue to grow due in large part due to the long-term decline in defined benefit pension plans. Its liabilities now exceed assets by almost $80 billion. With Sears in bankruptcy the PBGC has no choice but to assume responsibility for its two pension plans covering about 90,000 participants. The PBGC has been working with Sears for several years to improve the funding of its plans. The proceeds from the sale of its Craftsmen brand and certain real estate properties were contributed to the plans. These measures notwithstanding, the unfunded liabilities for these plans are about $1.4 billion. Assuming responsibility for these two plans is the biggest hit the PBGC has taken since the United Airlines bankruptcy in 2002.


Since 2016, more than 20 lawsuits have been filed against fiduciaries of university retirement plans. The defendants are among the largest and most prestigious schools in the country, as they present very visible targets. Many of these suits were filed by the same law firm, Schlichter, Bogard & Denton of St. Louis, one of the leading plaintiffs’ firms in ERISA litigation. Plaintiffs have not fared all that well. Although the University of Chicago settled in May of last year for $6.5 million, four schools have successfully made their case in court – Washington University in St. Louis, New York University, the University of Pennsylvania and Northwestern University. Also, plaintiffs voluntarily withdrew a suit brought against the University of Rochester. The first of these suits was filed against Duke – Clark versus Duke University. The plaintiffs alleged a series of fiduciary breaches including a dizzying array of investment choices; using four different recordkeepers; not offering index funds; paying excessive asset-based recordkeeping fees because the fiduciaries failed to leverage their large size in fee negotiations. While some of these practices are questionable, overall Duke’s approach has been typical of how large university retirement plans are administered. A settlement was announced only two weeks after Duke filed a motion asking the judge to dismiss the case. The trial had been set to begin in July. The settlement requires Duke to take the following steps:

  •  In the first and second years of the settlement period, provide plaintiffs’ counsel a list of the investment options, the fees and the IPS;
  • No later than Jan. 1, 2020, communicate in writing to plan participants the new investment lineup and provide a link to a web page showing performance and fees;
  • During the third year of the settlement, retain a consultant to advise it on RFPs for recordkeeping and administrative services; and
  • Plan assets may no longer be used to pay salaries and fringe benefits of employees performing services for the plan.

The settlement is hardly a windfall for the approximately 40,000 participants.

  • Named plaintiffs are seeking $25,000 each.
  • Legal counsel is requesting $3.5 million in fees and $825,000 in expenses.
  • Newport Trust Company is acting as an independent fiduciary at a cost of $30,000.
  • Analytics, LLC is serving as settlement administrator at a cost of $146,000.
  • This leaves a paltry $150 each for participants.


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