Secure Act 2.0 Student Loan Match: How It Works

Student loan debt precludes many workers from saving for their retirement. Employees with loan debt often have to make the difficult choice between paying off their student loans or saving for retirement. Moreover, student loan repayment commitments often prevent an otherwise eligible employee from contributing to their workplace retirement plan, causing them to forgo employer matching contributions. Thankfully, due to Secure Act 2.0, employers can make the employee’s decision somewhat easier, by taking advantage of the new, qualified student loan matching contribution feature. 

Realizing that paying down education debt and saving for retirement is a delicate balancing act, Congress created a formal process offering employers an approach to help lessen the financial strain of their employees laden with student debt. Under Secure Act 2.0, employers can provide for matching contributions on the basis of employees making “qualified student loan payments” (QSLPs). This new provision is available to employers sponsoring a 401(k), 403(b), governmental 457(b) plan, or SIMPLE IRA.

Notably, this feature is optional, and it’s effective for plan years starting after December 31, 2023. Since most plans are on calendar years, the provision is effective for them in 2024. The new student loan matching contribution should serve as an additional way for employers to increase an employee’s financial wellness, as well as attract and retain talent. 

A summary from the Senate Finance Committee describes Section 110, the provision of Secure Act 2.0 covering the treatment of student loan repayments as elective deferrals for purposes of matching contributions, as follows:

“Intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt and are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans. Section 110 permits an employer to make matching contributions under a 401(k), 403(b), or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee….”

• The law permits (it’s optional) 401(k), 403(b), 457(b) plans and SIMPLE IRAs to treat an employee’s QSLPs as elective deferrals (i.e., pretax, Roth, or after-tax) for purposes of receiving matching contributions. Effective for plan years after December 31, 2023. 
• An employer must offer the QSLP match to any eligible employee who participates in the plan, even if the employee isn’t contributing to the plan.
• Employees receiving QSLP matching contributions must otherwise be eligible to receive matching contributions on salary deferrals.
• Student loan repayments that can be treated as QSLPs are generally limited to the salary deferral limit for the year ($23,000; $16,000 for a SIMPLE IRA) less the participant’s elective deferrals (if any) for the year. In other words, the amount of loan repayments made by an employee count toward the annual limit on elective deferrals.
  
  Example: Bari, age 30, participates in a 401(k) that matches QSLPs, as well as salary deferrals. The 2024 salary deferral limit for employees under age 50 is $23,000; Bari defers $18,000. If Bari makes $8,000 of QSLPs in 2024, only $5,000 ($23,000-$18,000) of those repayments can be matched.

• Loan must be obtained solely to pay qualified higher education expenses. QSLPs must be for repayment of a qualified education loan for the higher education of the employee, employee’s spouse, or an individual who was the employee’s dependent at the time the loan was taken.
• QSLP is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
• Generally, qualified higher education expenses are related to enrollment or attendance at an eligible post-secondary school. These generally include: (1) tuition and fees; (2) books, supplies, and equipment, and (3) room and board. Other related items can potentially include computers and internet service—but expenses are only qualified higher education expenses if the student is enrolled at least part time.
• An employee must certify annually (to his or her employer) that a QSLP has been made. The employer can rely on this certification.
• Employers can establish reasonable procedures for employees to claim these matching contributions.
• Employees must be given at least three months after close of the plan year to claim the match.
• Matching contributions based on QSLPs are also eligible to be designated as Roth contributions.  Notably, it appears all matching contributions made on a Roth basis would need to be immediately vested.
• Both vesting schedule and matching rate must be same as if QSLPs had been made for salary deferrals.
• Student loan payments don’t count toward a plan’s Actual Deferral Percentage (ADP) test.

Employer interest in matching QSLPs will likely depend on the number of employees who have student loan debt.  Therefore, we believe these matches will have appeal to those employers who have or anticipate hiring a significant number of recent college graduates. Notably, employers, at first, will incur administrative complexity and plan-cost increase; the employer will likely make a matching contribution when it otherwise wouldn’t (where an employee chooses to make loan repayments rather than deferrals). However, employer QSLP matching contributions are tax deductible just like a traditional match.

Employers interested in QSLP matching should begin conversations with plan recordkeepers and other service providers to establish the necessary processes and procedures to implement this new feature, while also providing for employee education.

 Questions? Please contact your Lord Abbett representative at 888-522-2388.