SECURE 2.0’s student loan match takes effect in 2024: Are you up to speed?

For a long time, employers and employees have been able to take advantage of a special tax break on tuition and certain types of tuition-related assistance that has offered a boost to companies’ employee benefits programs.  Under Section 127 of the Internal Revenue Code, employees are not taxed on the first $5,250 of payments made by employers each year as part of an employer’s qualifying “educational assistance program.” Traditionally, an “educational assistance program” under Section 127 has meant an employer’s written plan for the payment of expenses incurred by or on behalf of an employee for the employee’s education, “including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment.”  Many companies have sponsored such programs over the years, paying or reimbursing these costs for employees who choose to further their education as one way to help advance their careers.

It would be understandable to have assumed that employer payments toward employees’ existing student loan debt, accumulated prior to employment, could be considered “similar payments” to tuition, and therefore tax-free to employees under this part of the Code.  But that actually was not the case until Congress acted and passed two temporary measures as part of its pandemic-related legislation in 2020. Until 2026, employer payments of principal or interest on an employee’s “qualified education loan” may be eligible for tax-free treatment up to the $5,250 annual maximum under Section 127.

Perhaps due to the temporary nature of this tax-free employee benefit, or a general lack of awareness of it, the “qualified education loan” addition to educational assistance programs seems to have landed with relatively little fanfare.  The Society for Human Resource Management (SHRM) reported in June 2022 that only 17% of employers surveyed by the Employee Benefit Research Institute had offered employees assistance with their student loan debt.  (As practicing ERISA attorneys, we also have seen firsthand the hesitation from some employers to wade into the area of student loans for one reason or another.)

And yet the personal challenges of repaying student debt, as well as resulting opportunities for employers to offer a competitive employee benefit, are not going away any time soon.  According to the AARP, at the end of 2020, $1.6 trillion in total student debt existed. And somewhat surprisingly, about 22% of this total was owed by Americans aged 50 or older.  So, despite common perceptions, the financial burdens of outstanding student loans are not at all limited to younger or entry-level workers.  In fact, older employees may have multiple student loans preventing them from building retirement savings: their own student loan debt plus that of their children and/or other family members.  The U.S. Supreme Court’s ruling in June of this year that struck down the Biden administration’s student loan forgiveness program has, for now, brought many of these issues back to the forefront of employees’ lives.

About five years ago, at least one employer, Abbott Laboratories, began looking for a new way to help employees repay their student loan debt.  In 2018, the IRS issued a private letter ruling to Abbott Laboratories, which approved of the company adding a student loan benefit to its 401(k) plan.  In the design, if eligible employees provided proof that some of their salary had gone to pay off student loans, Abbott Laboratories would “match” that student loan repayment with a contribution to the employees’ 401(k) plan accounts.  Following the issuance of that private letter ruling, which approved of the design only for Abbott Laboratories and did not address all of the practical details of such a program, other employers became interested in how to create a similar matching program within their own 401(k) plans.

Enter the SECURE 2.0 Act of 2022 (“SECURE 2.0”), which is the first law that links employees’ payment of student debt with the statutes governing defined contribution retirement plans, including 401(k), 403(b) and governmental 457(b) plans.  Section 110 of SECURE 2.0, effective for plan years beginning after December 31, 2023, allows employers to treat qualified student loan payments as elective deferrals for purposes of employer matching contributions to their defined contribution plans.  As a simple example, if an employee pays $400 per month toward a qualified education loan, the employer may, if it decides to and includes in its plan document, treat that payment as if the employee had deferred $400 from their paycheck to a plan account in their name and in turn also qualify for an employer match into their plan account.  There are the typical limits on such matching, including the annual elective deferral limit under Section 402(g), and the total limit on annual additions to defined contribution plans under Section 415, as adjusted by the IRS from year to year.  Nondiscrimination rules will similarly apply.

Related: Save for retirement or pay off student loans? SECURE 2.0 will help employees do both

Plenty of administrative questions abound about this section of SECURE 2.0, including the ability and willingness of plan recordkeepers to set up for this newly available feature.  However, the SECURE 2.0 legislation does provide some helpful administrative clarity upfront: (1) employers making matching contributions on student loan payments may rely on an annual certification by an employee that such payments have been made (rather than having to obtain proof of actual payments); and (2) employers will be permitted, in a manner to be clarified by Treasury regulations, to make matching contributions for qualified student loan payments at a different frequency (for example, monthly) than matching contributions are otherwise made under the plan (for example, weekly), provided that the matching contributions for student loan payments are made at least annually. There is one further complication under current law to the way student loan payments are treated for tax purposes under the Code. Under both SECURE 2.0 and the federal income exclusion on employer payments until 2026, a “qualified education loan” has the meaning in Section 221(d)(1) of the Code, which governs interest payments on education loans. Notably, Section 221(d)(1) defines a “qualified education loan” to include “any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses . . . which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer”. But the temporary income exclusion under Section 127 is restricted to employer payments on such loans that are “incurred by the employee for education of the employee”. Therefore, this tax-free benefit of employer payments toward student loans generally (up to $5,250 per year under Section 127) is expressly limited to an employee’s education.  It does not include employer payments towards loans for an employee’s spouse or dependents.  Section 110 of SECURE 2.0, on the other hand, does not include such a restriction.  Therefore, although it is expected that the Treasury Department will issue regulations to implement SECURE 2.0’s student loan provision and hopefully remove some of this confusion, it does appear that SECURE 2.0 would authorize an employer match for employees who have incurred student loan expenses for themselves, their spouses or their dependents, consistent with the definition of a qualified education loan in Section 221(d)(1).

So the larger question still remains: will student loan payments being treated as employee deferrals to retirement accounts result in more matching contributions by employers, and greater retirement savings in America? Congress certainly hoped so when it passed SECURE 2.0.  But only time will tell.

Timothy Klimpl is an attorney, practicing as part of Shipman & Goodwin’s Tax and Employee Benefits Practice Group. Tim is a member of the Fairfield County Bar Association where he chairs the Employment Law Committee and co-chairs the Business Law Committee.