In the News
June 10, 2019
By Robert Barba
Only a small percentage of companies help their employees with student-loan payments, despite it being a sought-after perk. But that could change dramatically if a proposed tweak to the tax code gains momentum in Congress.
There is no doubt that employees would welcome some kind of loan-relief benefit. A recent survey by YouGov commissioned by health-care company Abbott Laboratories ABT +0.36% found that 64% of adults with student-loan debt say finding a company with student-loan benefits is important. Yet last year only about 4% of employers offered student-loan-repayment assistance as a workplace benefit, data from the Society for Human Resource Management show.
What is keeping more employers from offering it? Many HR managers say the biggest obstacle is the tax treatment that student-loan-repayment assistance currently gets. Employers have to pay a payroll tax on the contributions, while employees who receive such assistance have to report it as taxable income.
To remove that snag, lawmakers in both houses of Congress earlier this year reintroduced bipartisan legislation that would permit employers to contribute up to $5,250 annually tax-free toward an employee’s student loans. The bills would accomplish this by expanding the section of the tax code that currently allows companies to provide tax-free tuition-reimbursement assistance in that amount to workers seeking to further their education.
Such legislation has been introduced before, but its backers say conditions are now ripe for it to win supporters. Americans have nearly $1.6 trillion in student-loan debt, according to the Federal Reserve, and that debt is having a ripple effect as borrowers often put off things like buying homes and saving for retirement. The tight labor market, meanwhile, is pushing companies to look for creative ways to recruit talent.
“It is an increasingly prominent problem,” says Rep. Scott Peters (D., Calif.), who in February reintroduced the bill in the House with Rep. Rodney Davis (R., Ill.). Sens. John Thune (R., S.D.) and Mark Warner (D., Va.) introduced the Senate bill.
Blazing the trail
Most student-loan-assistance programs are designed to complement the student-loan payments employees already are making and go directly toward the principal. There are a handful of firms in this space—including CommonBond, Tuition.io, Social Finance and Gradifi—that verify the employees have student debt and facilitate the payments. Companies can tailor their programs by, say, offering the program only to specific types of employees or specifying that the debt must be the employee’s debt, not a child’s or grandchild’s.
Even with the tax hit, some companies have started offering loan-repayment benefits as competition for young talent heats up.
In 2017, the human-resources team at Pure Group of Insurance Cos. noticed that its recent college-graduate hires weren’t taking advantage of the firm’s 401(k) match. The employees said they couldn’t afford to contribute to their retirement because their student debt was more pressing, says Katherine Richardson, chief of human resources at Pure. So, in early 2018, the company began offering its employees $100 a month toward their loans. It says about 25% of its 675 employees use it.
The current tax treatment of the benefit is a downside to the program, says Joanna Stein Weiner, assistant vice president of compensation and benefits. “We wish it was more tax efficient,” she says. “But to us, the benefits outweigh the costs.”
Fidelity Investments also began offering student-loan assistance to its employees in 2017. Its program provides workers with $10,000 over five years toward their educational debt—effectively $167 a month. About 6,000 of Fidelity’s 45,000 employees use the program, the company says.
Last year, Fidelity added a student-loan-repayment program to the suite of products it offers to companies who use Fidelity as a benefits administrator. So far, 66 companies are offering loan relief via Fidelity. The payroll-tax issue is a major deterrent for employers, says Asha Srikantiah, vice president of workplace emerging products.
As the bills work their way through Congress, some companies have found more tax-effective ways to help their employees address their student-loan debt.
“There is a ton of creativity,” says Scott Thompson, CEO of Tuition.io.
Last year, for example, Abbott Laboratories started a 401(k) match program tied to student-loan payments. Instead of the traditional route, where companies match what workers contribute to their retirement accounts, Abbott deposits the equivalent of 5% of an employee’s pay in a 401(k), as long as that employee is putting 2% of his or her pay toward student loans. Abbott sought and received approval from the Internal Revenue Service to structure its 401(k) match this way.
Mary Moreland, the divisional vice president of compensation and benefits at the Abbott Park, Ill.-based health-care company, says the current tax treatment on student-loan assistance was one of the reasons it decided to pursue this strategy. Since launching the Freedom 2 Save program in 2018, about 1,000 Abbott employees have taken advantage of it, she says.
CSAA Insurance Group of Walnut Creek, Calif., earlier this year said it was working with Tuition.io to allow employees to redirect a portion of their 401(k) match toward their student loans. The company offers a 6% match and the workers can redirect as much as 4% to student loans.
Insurance firm Unum UNM +1.92% in Chattanooga, Tenn., is working with Fidelity to allow its employees to transfer 40 hours of unused paid time off that would ordinarily be carried over to the next year toward student-loan repayments.
Others are structuring their student-loan-repayment benefits to limit the tax hit on employees.
Banfield Pet Hospital in Vancouver., Wash., has worked with CommonBond to offer its veterinarians $150 a month in student-loan-repayment assistance since 2017. The contributions are structured to cover the taxes employees incur, so that the net benefit is $150. Nearly 40% of Banfield’s 3,600 veterinarians nationwide are participating in the program, including Kirk Breuninger, who helped design the program.
“This program has removed years off my loans,” says Dr. Breuninger, “and it makes me feel more connected to my company.”