With the federal student loan debt relief plan ruled unconstitutional by the Supreme Court, more employers are expected to consider offering student loan repayment benefits (covered in Part 1) or retirement plan matching under the SECURE Act 2.0 of 2022. The optional provisions titled, “Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions,” are effective for contributions made in 2024. But regulatory guidance is needed before plan sponsors and retirement plan vendors can implement a matching contribution for student loan payments.
Here’s an overview of student loan matching plan design, why employers would consider offering, what is known about implementation and what regulatory guidance is expected.
What problem is the student loan matching provision intended to address?
To address concerns that student loan debt can limit retirement saving behavior, SECURE Act 2.0 student loan matching provision intends to make it easier for employees to accumulate retirement savings (using employer dollars) while paying student loan debt (using their own dollars). TIAA and MIT Age Lab found that 84% of borrowers say student loans negatively impact the amount they save for retirement. They also found that of 25- to 35-year-olds who are not saving for retirement, 39% say they are prioritizing student loan payments. This data shows an estimate of student loan borrowers who are not making elective deferrals to their workplace retirement account.
401(k), 403(b), governmental 457(b) and savings incentive match plans for employees of small employers (SIMPLE) plans can treat employees’ qualifying student loan payments as elective deferrals for purposes of matching contributions, starting in 2024, under the SECURE Act 2.0.
What are elective deferrals?
Elective deferralsare contributions an employee makes, in lieu of salary, to their workplace retirement plan account (e.g., an employee elects to defer 6% of their salary to their 401(k) plan).
Why would employers consider offering this match design?
In addition to assisting employees with retirement savings, an employer’s motivation for offering to treat student loan payments as elective deferrals for matching contributions is to attract and retain talent. This match can be especially helpful for plan participants who choose no elective deferral, or plan participants who make elective deferrals but not at a high enough percentage of salary to earn the full match and are making student loan payments.
Does the employer pay down the student loan?
No, the employer doesn’t pay down the loan principal or interest. The employer contributes to a retirement account.
What retirement plan types are applicable?
Sponsors of 401(k), 403(b), and governmental 457(b) plans or SIMPLE plans can make matching contributions with respect to employees’ qualified student loan payments (QSLPs).
What types of student loan are applicable?
As defined in SECURE 2.0 Act, qualified student loan payment (QSLP) means an employee-certified payment made by an employee in repayment of a qualified education loan incurred by the employee to pay qualified higher education expenses, but only to the extent aggregate payments for the year do not exceed the Internal Revenue Code (IRC) section 402(g) for the year (e.g., $22,500 in 2023), reduced by employee elective deferrals for the year.
(See IRC Section 221 subsections (d)1 and (d)2 for definitions of qualified education loan and qualified higher education expenses.)
What does the law say?
SECURE Act 2.0 Section 111, titled “Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions,” allows employers to match employee student loan payments with retirement plan contributions if the plan treats QLSP the same as an elective deferral for match rates, eligibility and vesting purposes. Additionally, the text of the law specifies the following.
- For nondiscrimination testing purposes, a plan may test separately the employees who receive matching contributions on student loan repayments.
- Employers may rely on employee certification.
- Treasury has regulatory authority regarding permitting plans to make QLSP matching at a different frequency than matching contributions are otherwise made under the plan, provided that the frequency is not less than annually; permitting employers to establish reasonable procedures for claim matching contributions for QLSPs under the plan, including an annual claim deadline (not earlier than three months after the close of each plan year) by which a claim must be made; model plan amendments.
As of this writing, no regulatory guidance has been issued to implement this law provision.
How do plan sponsors know about employee QSLPs?
To receive the match, an employee must annually certify to the employer that QSLPs have been made. SECURE Act 2.0 allows employers to rely on the employee’s certification without substantiation. Regulations could address certification.
When does the matching contribution happen?
SECURE Act 2.0 permits plans to:
- Match QLSP at a different frequency than matching contributions are otherwise made under the plan, provided that the frequency is not less than annually.
- Establish reasonable procedures for claiming matching contributions including an annual deadline (not earlier than three months after the close of each plan year).
What actions could interested plan sponsors take until the Treasury Department issues regulations?
- Estimate implementation costs. Employer costs for adding a student loan match provision to the plan include the increased match contribution and administrative expenses.
- To estimate the cost of an increased match, check recordkeeper data on participation rates and savings rates, and compare by age demographic. “If [younger workers’] participation rate is strong and no different from older workers, [a plan sponsor] might still want to offer this benefit, but it’s less urgent to do so,” said Dave Stinnett, head of strategic retirement consulting at Vanguard according to PLANSPONSOR. “It’s different if younger workers aren’t joining the plan. Then maybe it’s more urgent and you would want to move fast and offer this,” Stinnett said.
- “Administrative costs will stem from: increased per-participant fees due to participation by employees who might not otherwise elect to make any deferrals, additional fees for nondiscrimination testing, and tracking and maintaining student loan match self-certifications,” per RSM contributors.
- Estimate employee interest in claiming the match. Survey your employees to gain insight into how many employees are repaying student loans and the annual dollar amount. Are they concerned about retirement security? Let them know that under a student loan matching plan feature, they would have to share information about their loan to their employer via self-certification. Would they participate and claim the match if offered? Would they find value in the benefit?
- Assess existing financial wellness programs and total compensation strategy already in place.
- Check whether plan service providers have administrative processes in progress.
What are plan sponsors and administrators waiting for?
There are many open questions about how to implement and administer a retirement plan matching contribution for student loan payments. Some industry stakeholders have sent letters to the Treasury requesting guidance on some of the following topics.
- Model plan amendments
- QSLP match frequency
- Allowing participant claims at least three months after the end of the plan year (whether this is optional or required)
- Administrative expenses (whether employer has discretion to charge the administrative cost of the student loan provision in any reasonable manner to all participants in the plan or only to the student loan match claiming participants)
- Terminated participants
- Discretionary matching
- Employee claim procedures and certification guidelines
- Plan sponsor disclosure guidelines and privacy practices
- Correcting errors
- Nondiscrimination testing.
The International Foundation will be tracking regulatory guidance on student loan payments as elective deferrals for matching purposes. It seems that plan sponsors are taking a wait and see approach.
SECURE 2.0’s Student Loan Match 101 [Mercer]
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.