Practice Management October 11, 2023

As Student Loan Repayments Resume, Employers Can Help

Advisers and employers can prepare their participants for the financial shift and potential eligibility for matching funds in 2024.

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Student loan repayments restart this month after more than three years of hiatus, and it has raised alarm bells for many savers in terms of how they will manage, according to a recent poll by Equitable Advisors, the wealth management division of Equitable Holdings Inc.

In late September, a survey of 500 Equitable Advisors’ financial professionals showed that among clients concerned about their student loan debt one year ago, nearly all (94%) are more concerned about their student loan payments today. In fact, among a list of financial concerns raised by clients to their advisers, student loan payments saw the biggest increase compared to 2022, according to the firm.

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That heightened awareness, while a concern, is also a moment for advisers and employers to engage with employees on how to manage the cost, says Randal Lupi, financial adviser, Equitable Advisors.

“We have to tackle this hurdle,” Lupi says. “The people that were seasoned borrowers and payers had a stall, and now they’re starting again … but there are also those that graduated during the COVID forbearance that have never made a payment. That’s a big transition for them.”

Lupi says it is important for student loan borrowers to step back and consider their current situation, options and “make sure their ducks are in a row.” That includes, he says, making sure their student loan payments are “qualifying” for employer matching by meeting the minimum payment on time.

That is crucial, in part because if employers start offering an employer retirement plan match for student loan contributions in 2024—when it is made possible by SECURE 2.0—the payments need to be qualifying payments, he says.

“If they start making late payments or need to catch up, that is one of the rules with that plan: … You have to have a qualifying payment,” Lupi says.

Here, Lupi says, is where employers can step in to make sure employees have access to wellness offerings and advice to guide them. This can include looking for current federal relief options, as well as budgeting in a way that is sustainable, both for the loans and retirement saving goals.

Explore Options

Kim Cochrane, a retirement plan adviser at Hub International, notes that paying student loans will have a significant impact on many people’s finances, including how they are managing their workplace retirement plans. During the hiatus, many people “bought cars, bought homes and just spent the money on other things,” Cochrane notes.

“It’s hard enough that inflation has really been tough on a lot of the employees, and then the return to work, then the student loan repayment … and then the holidays are coming up,” she says. “I think this is going to have an effect, and I think employers are going to see it pretty quickly.”

The answer, Cochrane says, is not just for employers and advisers to push continued retirement plan deferrals. They should instead take a holistic approach that helps student loan borrowers assess their options.

“We want them to be smart,” she says. “They should not be contributing more than they can afford. If all of these variables are happening, we don’t want them to be put into a worse financial position because they didn’t pull back. It’s a balance.”

A student loan match by employers will absolutely be helpful, Cochrane says, but that solution may be a long time coming. The mechanics of making that match are not that difficult from the employer side, Cochrane says. The challenge is more on the provider side.

“What’s not in place is really on the recordkeeper side,” she says. “Imagine when they’re looking at the report and they see a match that comes in with no corresponding deferral dollar, or that the formula doesn’t match. They have to do programming to not kick that out or to somehow denote that that’s a [qualified loan repayment plan].”

In the Meantime

Ahead of matching implementation, though, employers should be proactive in addressing student debt with staff, both Cochrane and Lupi say. Employers can currently educate employees on resources and options, such as:

  • Seeing if they qualify for the government’s Save Plan, an income-based repayment scenario, via which an employee can delay payments if they cannot make them, though interest will still accumulate;
  • Workers at nonprofit organizations have access to a student loan forgiveness program inside of 10-year accredited service, though adviser Lupi notes that they need to take care in using any credit consolidation providers; if they are using a private consolidator, as opposed to a federal consolidator, they will lose eligibility); and
  • Employers can offer education programs focused on budgeting to help people manage their costs and reduce expenses, as well as which debt to pay off first.

Employers can also contribute toward student loan debt if it is a major issue among their participants, Cochrane notes. These options include:

  • Employers can give a certain dollar amount to every employee that can go to the student loan program, the 529 program or a cafeteria program for each participant to decide how to use; and
  • Employers can also give more than $5,250 for student loan repayment programs; this is tax-deductible for the employer and tax-free for the employee as a benefit.

Lupi says nonprofit employers have started bringing him in to discuss options for student loan management, including organizations employing large populations coping with significant loans, such as hospitals, in part to meet employee demand.

“The employers have already started doing that with some of the options that are out there,” he says. “100% it is a retention play.”

Compliance October 11, 2023

Two Plan Sponsors Accused of Improper Use of 401(k) Forfeitures

ERISA experts point to longstanding and widespread practice of using forfeitures to reduce future employer contributions or pay reasonable expenses.

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In two recent lawsuits, plan fiduciaries have been accused of violating ERISA by using plan forfeitures to offset future employer contributions, as well as to pay administrative expenses.

The use of forfeitures, or the non-vested portion of a former employee’s account balance in a retirement plan, to offset employer contributions is a longstanding practice explicitly permitted under Treasury regulations and consistent with guidance from the Department of Labor, according to Groom Law Group.

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Representatives from the law firm, which is not involved with either case, stated that the claims are surprising, given that this use of forfeitures is well established and widespread.

Separate Complaints Filed by Same Law Firm

In Dimou v. Thermo Fisher Scientific Inc.—filed on September 19 in U.S. District Court for the Southern District of California—Konstantina Dimou, a participant in Thermo Fisher’s 401(k) plan and represented by law firm Hayes Pawlenko LLP, alleges that the employer breached its fiduciary duties under the Employee Retirement Income Security Act and “consistently chose to utilize the forfeited funds in the plan exclusively for the company’s own benefit, to the detriment of plan and its participants, by using these plan assets solely to reduce future company contributions to the plan.”

The biotechnology company, which has more than $6 billion in plan assets, maintains offices in South San Francisco and Carlsbad, California, among other national and international locations, and employs more than 300,000 people.

According to the complaint, the governing plan documents state that the company will allocate and use all or a portion of a participant’s benefit forfeited under the plan to either pay for “reasonable expenses of the plan” or reduce its discretionary contributions, special contributions, matching contributions and other contributions payable under the plan.

The complaint alleges that Thermo Fisher consistently declined to use any of these plan assets to cover plan expenses over at least the past six years. Further, the lawsuit states that all participant accounts have been charged with administrative expenses, on at least a quarterly basis, over that period.

“The deduction of administrative expenses from participant accounts reduces the funds available to participants for distributing and/or investing,” the complaint states.

Thermo Fisher did not immediately respond to a request for comment.

In another complaint, Rodriguez v. Intuit Inc., filed on October 2 in the U.S. District Court for the Northern District of California, plan participant Deborah Rodriguez, also represented by Hayes Pawlenko LLP, similarly alleges that Intuit Inc. reallocated forfeited funds for its own benefit, to the detriment of the plan and its participants.

The financial software company is accused of reallocating nearly all forfeited plan assets to reduce future company matching contributions to the plan, according to the complaint. As of 2021, the plan had more than $2 billion in assets, according to Form 5500 filings.

The complaint states that in 2021, company matching contributions to the plan were reduced by $2.273 million as a result of Intuit’s reallocation of forfeited nonvested funds for “the company’s own benefit.” Only $74,000 of nonvested funds were used to pay plan expenses totaling $975,040, leaving a balance of approximately $140,000 in the forfeiture account, according to the complaint.

“Intuit has received notice of this complaint and is reviewing the matter,” a spokesperson wrote in an email. “We are proud to offer our employees best-in-class benefits designed to support health and financial well-being for themselves and their families. This includes helping them build long-term financial security through our 401(k) retirement plan, where we match $1.25 for every $1 contributed by regular full-time employees in the United States, up to 6% of the employee’s eligible pay.”

Allegations Considered ‘Implausible’ by Legal Experts

In both cases, the plaintiffs seek the “restoration” to the plan of amounts used to offset employer contributions, disgorgement of the assets and profits made by the plan sponsors’ use of the money that would have been contributed, attorneys’ fees and other equitable relief.

Marcia Wagner, founder and managing partner of the Wagner Law Group, which is not involved in either case, said almost all defined contribution plans permit forfeitures to be used to reduce future employer contributions or to pay reasonable expenses, and some plans also permit, as a third alternative, allocating forfeitures among plan participants. She added that she would be surprised if these lawsuits are successful.

“For there to be a prohibited transaction under ERISA, the relevant plan fiduciary must know or should have known that the transaction was prohibited, and in view of this long-standing practice been approved by the IRS for inclusion in tax qualified plans, such an allegation would be implausible,” Wagner wrote in an emailed response. “From an ERISA fiduciary perspective, the language of a plan document must be followed unless it is improper, is inconsistent with the terms of the plan or violates ERISA.”

Wagner said the only basis for a challenge would be if the use of the forfeitures to reduce employer contributions is inconsistent with ERISA’s exclusive benefit requirement. However, she said that statutory language does not prohibit an employer from receiving some benefit from a transaction.

If the complaints are successful, Wagner said “potential implications would be great,” because of how widespread and longstanding the existing practices for the application of forfeitures are.

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