A Private Letter from the IRS – Leveraging the 401(k) Plan to Reduce Student Loan Debt

Today I want to highlight two things:

• First, I want to let readers know that the IRS is NOT a set of big bad bullies. To the contrary, they are an enforcement organization that is very fair and willing to clarify confusion in the tax code when it exists.
• Second, I want to use a bit of a non-traditional 401(k) benefit to re-emphasize the importance of fully leveraging all the benefits you may have available to you if your place of employment offers a 401(k) plan.

Without further ado, let’s begin.

I recently came across a Private Letter Ruling (PLR) from the IRS that highlighted an issue that a particular company had been facing. The specific PLR can be found here. The situation is as follows:

• A company wanted to help employees pay down student loan debt.
• To do so, they thought it would be a great idea to “match” the amount that employees paid down on their student loan debt with an identical company contribution to their 401(k).

A great idea! Encourage your employees to pay down a debt by providing a dollar for dollar benefit in the 401(k) (actually not QUITE dollar for dollar as one is pre-tax, and one is post-tax, but still generous!). Unfortunately, it was not clear from the tax code if this was permissible.

As a result, the company requested a PLR from the IRS. In the PLR, the IRS found that it was acceptable to proceed as the company requested. Now while PLRs are something that I am fully familiar with, many people may not know they exist. Ruling don’t come free as there is a fee from $200 to $28,300 depending on the type of ruling sought.

However, what is good to know—in my opinion—is that the IRS does have a facility available to get additional guidance if/when individuals need it.  While I do NOT like taxes, I do have a great deal of respect for the IRS and the documentation, guidance, and support that they provide to us as taxpayers. I actually have a great deal of SYMPATHY for them—let’s face it these guys have to figure out how to actually implement and enforce the “lovely” laws that Congress passes/enacts. (I’ll refrain from sharing my thoughts on the behaviors of our “friends” in DC who pass these laws.)

While it unlikely that your company will be willing to institute such a benefit —it never hurts to ask—this PLR does underscore the ability of companies to provide “company” contributions to 401(k) plans. In my opinion, it is almost always a good idea to do everything in your power to obtain available company contributions to your 401(k) plan.

In most cases, the company’s contribution comes in the form of a “matching contribution” where the company “matches” a certain percentage of employee contributions to their 401(k)’s. Many, many people I encounter are hesitant to contribute the required amount to obtain the full company contribution. Folks, if a company is offering to give you a match, you normally need to take it!

I still remember early on when I entered the workforce. At this point in time, there were two benefits available to me. Option one allowed me to contribute to a retirement account where I would invest in a number of mutual funds. A good, solid option. The second option allowed me to contribute into a specific company-sponsored plan where they would match my dollars. The person going over these two options was an employee of the mutual fund company in option one. Someone asked him, “Which should I do?” and I will NEVER forget his response:

• I can’t guarantee you that a mutual fund will go up, but I can guarantee you that if you put it in the company’s program, you are going to get an immediate positive return from their match.

Game over. I took the match. Now, in full disclosure, I ALSO made plans to maximize the contribution to the other plan ASAP. But the FIRST—and best—option was to “grab the match.”

My message to you is this: take the time to understand your 401(k)-plan benefit and fully leverage it in any/all ways—via matches, via investment choices, via legal contribution limits. This is one of the best ways to build wealth that I know of.

Hopefully, after reading this blog post, you will have a bit more motivation to dig deeper into your 401(k)-plan benefit—if available—or to consider retirement planning via other available alternatives.

• Do you have a well-defined Investment Policy Strategy that is used to drive your investments?
• If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner?

If so, feel free to send us an email or give us a call.We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.

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