In the never-ending battle for talent, the recently passed SECURE 2.0 Act unlocks a unique opportunity for employers to address a looming conundrum for many of today’s recent graduates: Pay down student loan debt or save for retirement?
- The new provision allows employers to make retirement plan matching contributions based on qualified student loan payments.
- The resuming of federal student loan payments may reignite interest in offering student loan-related benefits.
- While additional guidance is needed before implementation can begin in plan years after December 31, 2023, student loan matching may prove a worthy consideration for employers hoping to attract and retain recent college graduates.
What Is Student Loan “Matching?”*
To help more people save for retirement, the new provision expands on what many employers were already doing.
Often, companies will offer an employer-sponsored retirement plan, like a 401(k), as a way for employees to save on a tax-advantaged basis. As an additional benefit, companies may contribute to these plans on the employee’s behalf. This is often done by “matching” up to a specified percentage of the employee’s contribution to the plan.
Matching contributions are a wonderful benefit for those willing and able to save. Unfortunately, they can be missed opportunities for those saddled with student loans and unable to contribute to a traditional employer-sponsored retirement plan.
The SECURE 2.0 Act attempts to change that by allowing companies to offer retirement plan matching contributions based on employee payments toward “qualified” student loans (as defined by the IRS).
Why Would an Employer Consider This?
While the provision is new, the concept is not. In 2018, Abbott Laboratories developed the “Freedom 2 Save” program. Similar to the current provision, Abbott wanted to offer retirement plan contributions based on employee contributions toward their student loans.
In a 2019 press release, the company cited statistics1 in support of its decision to develop the program:
- A recent survey of college students shows that nine out of 10 of them are on the hunt for a company with a student loan perk.
- Sixty-two percent of employed adults with student loans would consider switching companies to gain a student loan relief employee benefit.
- Forty-two percent of adults with student loans aren’t saving for retirement due to their student loans, including almost half (48%) of people with student debt ages 18 to 34 and more than a third (34%) of those 55 or older.
The explanation is simple. The company believed the program would be an attractive benefit to its current and target employees. However, without the current SECURE 2.0 Act provision on its side, Abbott had to blaze its own trail. As the company explained in its 2019 press release, this required a private letter ruling from the IRS:
“Others have expressed interest in copying our innovative program structure. Abbott is currently the only company we know of with a private letter ruling from the IRS to structure our program in this unique way. But several bills have been introduced in legislature—with bipartisan support—that would make the Abbott model accessible to more companies. An industry group has also lobbied the IRS to expand its ruling to broaden it to other companies.”
Whether Abbott was correct in its assertion that new legislation would be necessary for widespread adoption, or there was ultimately a lack of interest from employers, Abbott’s model remained a niche program. What is more certain is that less than a year after Abbott’s press release, COVID-19 would dramatically change the student loan conversation.
As a response to COVID-19, the U.S. Department of Education suspended payments on federal student loans in March 2020. That was followed by the signing of the Coronavirus Aid, Relief, and Economic Security Act, which extended the freeze on student loan payments and began a series of extensions that is expected to end in 2023.
At this time, student loan payments are set to resume in late August 2023—or earlier if the courts provide a ruling before June 30—and will likely reignite interest in student loan relief.
Moreover, the SECURE 2.0 Act provides the legislation Abbott had envisioned to address the hurdles it overcame. Through the Act:
- Matching payments can be made for 401(k)s, 403(b)s, SIMPLE IRAs, and government 457(b) plans.
- Since “qualified” student loan payments would be treated as contributions, it helps clarify that employers wouldn’t be forced into making two matching contributions for one employee.
- “Qualified student loans” may include debt incurred from tuition, books, and room and board. (More clarification is needed to determine other potential related debt.)
- In regard to testing, specific language was included addressing the complexities of employer contributions to retirement plans and required plan testing requirements. Additional clarification is expected to come as employers implement these provisions.
- Like hardship withdrawals, employers may rely on “self-certification” for student loan contributions rather than employers being forced to verify eligibility.
What Comes Next?
The new feature will be effective after December 31, 2023. That provides time for the additional guidance and clarification in the new law around the myriad implementation and discrimination testing questions that are sure to come. For employers, the additional guidance may provide more insight into the ultimate cost of implementation and administration.
In the meantime, employers are perhaps best served by considering the following questions:
- Is the business interested in offering a student loan-related benefit?
- Does the business currently have a retirement plan and offer a match?
- Does the business have a high population of employees with student loans who are not currently contributing to the plan?
- Is the business actively hoping to attract more employees that may fall into that category?
Under the right circumstances, the SECURE 2.0 Act’s student loan matching provision may be an appealing benefit for employers hoping to offer relief to their employees while differentiating themselves from the competition.
If you have any questions or need assistance, please reach out to a professional at FORVIS or use the Contact Us form below.
*The IRS interpretation of “matching” contributions is still pending. Guidance is subject to change.
Other Articles in This Series
- Making the Most of SECURE 2.0 Act Catch-Up Rules
- SECURE 2.0 Act: When Is It Wise to Make an Early Withdrawal?
- Roth Updates in SECURE 2.0 Act
- How SECURE 2.0 Can Help Defined Contribution Plan Participants Access Emergency Funds
- SECURE 2.0 Act: The Role of Trusted Advisors in an Ever-Changing Retirement Landscape
- 1“Got Student Debt? We Got You,” abbott.com, June 26, 2019