SECURE 2.0’s new tool for helping employees with student loans

The SECURE 2.0 Act of 2022 (SECURE 2.0 or the Act), enacted on Dec. 29, 2022, provides for a new tool that allows employers to contribute a matching contribution to a defined contribution plan based on the amount of an employee’s student debt repayments. The purpose of the provision is to assist employees who may, because of their student loan debt, decide against making elective contributions by payroll reduction and as a result, miss out on employer matching contributions.

Starting in 2024, an employer may amend the plan to provide for a student loan matching contribution on behalf of an employee making periodic student loan repayments to a third party. The amount of the match is calculated as if the employee had elected to contribute the loan repayment amount to the plan by payroll deduction, even though the employee’s pay is not actually reduced by that amount and the employee does not in fact make any elective contributions to the plan.

The student loan match provision applies to Internal Revenue Code (Code) sections 401(k), 403(b), 457(b) governmental plans, and SIMPLE-IRA plans. Student loan repayments considered for match purposes cannot exceed an amount equal to the annual maximum deferral limit ($22,500 for 401(k)/403(b)/457(b) and $15,500 for SIMPLEs), less the elective deferrals made by the employee. Additionally, the provision requires that the eligibility, match rate, and vesting requirements applicable to the student loan match must be the same as that for the match on regular elective deferrals. For administrative convenience, the student loan match may be made less frequently than regular matching contributions but must be made at least annually.

Under the provision, an employer is not required to request or obtain student loan documents, evidence of payment, or other documentation relating to the student loan match. Instead, the participants may simply certify that the student loan repayments were made and the amount of each payment, although some employers may want more.

The intent behind the student loan match provision suggests it would be available only to employees who are repaying their own student loans. However, there are questions around whether a parent who is repaying debt obtained to pay for a child’s higher education would be able to take advantage of the match. Changes made by SECURE 2.0 reference section 221(d)(1), which notes that a "qualified education loan" is any indebtedness by the individual which is used to pay for higher education expenses and incurred on behalf of the individual, the individual’s spouse or any dependent. Hopefully, clarification will be included with regulations to be issued by the treasury.

Non-safe harbor 401(k) plans are required to apply a nondiscrimination test to both elective deferrals (ADP) and employer match (ACP) contributions. SECURE 2.0 allows a plan to apply a separate ADP test to participants who choose to take advantage of the student loan match provision. This makes sense because employees who take advantage of the provision are either not contributing elective deferrals to the plan or are contributing at a lower rate. It may also be that these employees are primarily non-highly compensated, and the ADP test could be negatively impacted if they were included in testing with the entire plan population. There is no similar provision for the ACP test because the student loan match made for non-highly compensated participants not otherwise participating in the plan would positively impact the test.

A plan’s ADP and ACP nondiscrimination testing are often completed within a couple of months of year-end so that failures can be corrected in the form of refunds prior to 2-1/2 months after year-end, which is the deadline under the applicable Code sections to avoid an excise tax. It is worth noting that the deadline for self-certification can be no earlier than three months after the end of the plan year. Therefore, testing typically done during the 2-1/2 months after year-end may have to be delayed pending completion of the self-certifications. Employers will need to determine if this timing conflict will be an issue for them.

Further, because the SECURE 2.0 provision defines the employer contribution as a match, the student loan match satisfies the contingent benefit rule. According to the contingent benefit rule, no other benefit may be directly or indirectly conditioned (directly or indirectly) whether the employee elects to make an elective contribution under the plan, except as a matching contribution made by reason of such an election. Section  1.401(k) – 1(e)(6) and IRS PLR 201833012 (Aug. 17, 2018) issued to Abbott Laboratories.

Consider the following example of the impact of a student loan match on an employee’s account balance:

Company’s 401(k) plan matches 100% of deferrals up to 3% of eligible compensation and provides for a match on student loan repayments. Andy’s annual take-home compensation is $125,000. His annual student loan repayments equal $9,600, and he is trying to decide what, if anything, he can afford to have withheld from his pay as an elective deferral and still the receive maximum employer match available to him, which is 3% of compensation, or $3,750. On Nov. 1, 2024, he self-certifies the information required to receive a student loan match. The examples below show how he might make his decision.

• Scenario #1 – Andy does not make any regular deferrals for 2024, and his take-home pay is not reduced. His annual student loan repayments of $9,600 are treated as equivalent to a deferral of 7.6% of his compensation, and he receives the maximum match of $3,750 available to him. His ending 401(k) account balance for 2024, not counting earnings, is $3,750, and his take-home pay remains at $125,000.
• Scenario #2 – Andy decides he can afford a regular deferral of 1.5% of pay, and his take-home pay is reduced by $1,875 per month. The sum of his regular deferral and student loan repayments is treated as if he had deferred 9.2% of compensation and he receives the maximum 3% match of $3,750. His ending 401(k) account balance for 2024, not counting earnings, is $5,625, and his take-home pay is reduced to $123,125.
• Scenario #3 – Andy decides to maximize his matching contribution solely by making regular deferrals. He does not self-certify for the student loan match, and his loan repayments are not counted in the match calculation. His deferral is 3% of pay, and he receives the maximum match of $3,750. His ending 401(k) account balance for 2024, not counting earnings is $7,500, and his take-home pay is $121,250.
  

• Scenario #4 - By way of illustration, however, assume that the plan has an unusually high matching contribution rate. Andy certifies that he has student loan repayments of $15,000 and elects to make regular deferrals of $10,000 (no catch-up contribution included). In that case, not all of Andy’s $15,000 student loan repayment could be considered for a student loan match because the maximum annual deferral limit of $22,500 (in 2023) would be reduced by the regular deferrals ($22,500 - $10,000), and only $12,500 of the student loan repayment would count for purposes of the student loan match.

The cost to an employer for adding a student loan match provision to the plan comes in a couple of forms – the increased match contribution and administrative expenses. If the provision becomes highly popular among employees, the employer could see a significant increase in the amount of its matching contributions. Administrative costs will stem from:

1. increased per-participant fees due to participation by employees who might not otherwise elect to make any deferrals,
   
2. additional fees for nondiscrimination testing, and
3. tracking and maintaining student loan match self-certifications.

The IRS is expected to issue guidance on the SECURE 2.0 provision, including implementing regulations and a model plan amendment for those employers wanting to make this optional plan change.

Employer business considerations

The first consideration in adopting a student loan match under SECURE 2.0 is whether it makes business sense, for example, in recruiting and retaining talent. Employers should assess how many employees are currently repaying qualified student loans, as well as the jobs they hold. The student loan match may make sense for employers who wish to assist all employees with student debt without regard to salary level or job function. In any event, employers should assess the costs and administrative burdens of the student loan match. Another consideration is how the student loan match fits into an employee’s total compensation package and the extent to which student loan repayment obligations were already built in, e.g., in the form of higher compensation or other benefits.