A new benefit for employees with student loans: The 401(k) match

Whether we have seen the end of the Great Resignation or a move to the Great Layoff, employers continue to seek out ways to be an employer of choice.  Employers are always struggling to attract and retain the best employees.  Various tools abound, but for many younger employees the ability to offer ways to address their student loans might give employers one of the better tools to retain those employees over time.  If employers want to provide those options in 2024 they now can thanks to new provisions in the SECURE 2.0 Act—but they need to take action to make it happen.

Student loan debt: Where things stand

The Biden administration just canceled a large portion of student loan debt.  That brings the total forgiveness of student debt by the Biden administration to approximately $136.6 billion according to the Department of Education.  However, the total student loan debt is in the $1.6 trillion range.  So, even with the forgiveness programs announced so far, the vast majority of student loans have not been forgiven.  After the COVID-19 pause ended in October 2023 borrowers who had to restart their loan repayments had to suddenly include those loans in their budgets again with the resulting financial shock.

With that repayment shock hitting, many younger employees, typically those with outstanding student loan balances, wondered what their employers might be doing to assist with those loan repayments.  Traditionally, employers could be expected to take the position that they offered competitive salaries and benefits, but individual financial issues were the responsibility of the individual.  Even if employers had wanted to offer assistance with loan repayments, there was no incentive to do so since the assistance would have been no different than any other taxable income paid to employees and did not offer any meaningful differentiator for the employer.

Recent years have seen the expansion of wellness plans to include financial wellness so employers might be more inclined to address these issues than they have in the past, and recent legislation has made it easier.

SECURE 2.0 Act offers new repayment options

In 2024 the SECURE 2.0 Act of 2022 provides a new option tying student debt repayments to employer 401(k) plans.  Recognizing the difficulty of saving for retirement while still being burdened by student debt, the new law permits employers to treat employees’ qualified student loan payments (“QSLP”) as though they were contributions to the employer 401(k) plan and, therefore, eligible for employer matching contributions into the 401(k).  The loan repayments themselves are not retirement plan contributions so are not directly subject to the normal 401(k) requirements, but the employer contributions are subject to the 401(k) rules.

The total amount of the repayments that can qualify for the match and any other elective deferral is the lesser of (1) the annual deferral limit in effect for the year ($23,000 for 2024) or (2) the employee’s compensation. Repayments will only be made if the employee certifies, annually, that the repayment is made for qualified higher education expenses.

All qualified retirement plans must be in writing and administered according to their terms.  Therefore, employers who want to permit matching on student loan repayments will have to adopt a 401(k) plan with all of the attendant 401(k) rules. Or, assuming that the employer likely already has a 401(k) plan in place, adopt amendments to the 401(k) plan that incorporate the student loan repayment match.

Those amendments will likely define how the employer match will be made and on what basis the student loan repayments will be considered in that process.  Important aspects of those changes include that student loan repayments will offset the maximum amount that the employee can otherwise contribute to the 401(k) plan, and a requirement that the employee certify, annually, that the student loan repayment is for qualified educational expenses.

Additional benefits and employee adoption

The loan payments are subject to additional requirements as specified in the law, but regulations have yet to be adopted to clarify all the requirements.

The QSLP offers some additional benefits to the employer:

1. The employer subsidizes the repayment of the student loan, but it requires the employee to participate in that process as well.
2. It encourages participation in the employer retirement plan which will assist the employee in the future to develop the habit of saving in the 401(k) and begin to build up their 401(k) balance even as they pay down the student loan.
3. The program is a permanent part of the IRC (or as permanent as any legislative provision might be) so it is going to be an ongoing program rather than a short-term patch.
4. The tie to the employer should be tighter as the repayment program is long-term and is directly linked to the employer retirement plan.
5. They provide a new option to use the employer retirement plan to assist employees with their financial well-being.

The benefits for employees with student loan debt are obvious.  Nevertheless, clearly communicating why and how to opt into the new program is important for adoption.  Employers will need to follow guidelines to inform employees about the new program, and it’s important to use several different forms of outreach. They’ll also need to advise employees about their compliance responsibilities, including deadlines.  Brokers will want to emphasize the immediate benefits of student loan assistance, as well as the long-term benefits from participating in an employer 401(k) program, including that retirement planning is a key element in financial wellness.

Related: SECURE 2.0 rolls out new student debt (and education) benefits in 2024

While adding the repayment option as a match to the employer 401(k) plan requires some plan amendments, the new SECURE 2.0 Act regulation adds a sticky way to offer employees a tax-advantaged option to assist with their student loan repayments while building employee loyalty and aiding in the adoption of long-term retirement planning.

Jay Kirschbaum is Senior Vice President and Benefits Compliance Director at World Insurance.