The burden of student loan debt is an ever-present challenge for our former post-high school students. As you probably know, President Biden had proposed a student debt forgiveness plan that was projected to relieve as much as $430 billion in student debt under which up to 43 million borrowers would have been relieved of at least some of their student debt.1 However, on June 30, 2023, the U.S. Supreme Court ruled that President Biden’s student debt forgiveness plan was unconstitutional.2
Student loan payments and interest accruals that have been paused since March 2020 under the COVID-19 relief rules are scheduled to resume in the fall. 3 With student debt forgiveness no longer available and loan payment obligations resuming, many employees carrying student loan debt are likely to have a renewed interest in employer initiatives that are intended to relieve student loan burdens.
The financial burden of student loan debt often impacts participation in an employer’s retirement plan. Employees with student loan debt may not have the available resources to both pay the student loan payments and save for retirement. And as financial experts routinely point out, the failure to start saving for retirement early in an employee’s working life can substantially reduce the amount of retirement savings the employee accumulates over time. An employee’s preparation for retirement can be significantly impacted by student loan debt.
However, recent legislation will allow employers to contribute a new type of matching contribution on behalf of employees who are making student loan payments even if the employees are not making salary deferral contributions to the plan.4 Instead of tying the matching contribution to deferral contributions to the plan, the matching contributions can be based on the amount of the employee’s student loan payments (subject to certain limits). This means that these employees would not have to entirely forgo retirement savings while paying off student debt.
SECURE 2.0 Offers New Plan Design – Matching Contributions Tied to Student Loan Payments
Which Plans Can Add a Match on Student Loan Payments?
Employers who sponsor defined contribution plans such as 401(k), 403(b), governmental 457(b) plans and SIMPLE plans can offer matching contributions to the plan based on employees' qualified student loan payments (QSLPs).
When can this new plan design be effective?
Employers can add this feature to their retirement plans for plan years commencing after December 31, 2023.
What is a qualified student loan payment (“QSLP”)?
A qualified student loan payment (“QSLP”) is a payment for a "qualified education loan,” which is a loan incurred to pay higher education expenses of the employee, the employee’s spouse or a dependent at the time the loan was incurred. Loans taken to cover elementary or high school tuition would not be considered a “qualified education loan”.
What are the Basic Requirements for Employer Matching Contributions on Student Loan Payments?
- The rate of the QSLP match should generally be the same as the rate of the plan’s regular matching contribution. For example, if a participant can receive a $1 for $1 matching contribution on employee contributions, capped at 5% of annual compensation, the plan’s QSLP match should generally also be $1 for $1 matching contribution based on QSLPs, capped at 5% of annual compensation.
- Eligibility to receive the QSLP match should generally be the same as the plan’s regular matching contribution. For example, if an employee must complete one year of service to receive the regular matching contribution under the plan, an employee should be required to complete one year of service to receive the QSLP match.
- Eligibility for a match on QSLPs should be extended to all employees who are eligible for a match on their regular deferral contributions. For example, if part-time employees are eligible for a match on their regular deferral contributions, they must also be treated as eligible for a match on their QSLPs.
- The frequency of the QSLP match can be different from the regular match, as long as the QSLP match is made at least once a year. For example, if a plan makes the regular matching contribution each calendar quarter, the plan is permitted to make the QSLP match just once a year.
- The QSLP match can be made as a Roth contribution if the plan allows participants to designate employer matching contributions as Roth contributions.
- Employees must certify each year that they have made qualifying student loan payments in order to receive the QSLP match. Employers can rely on the employees’ certifications.
- Employers must allow a minimum of three months after the end of the plan year for employees to request the QSLP match from their employer.
- The QSLP match will be subject to the plan’s annual nondiscrimination testing. Special testing rules will apply to these contributions.
More Guidance Needed
Clear IRS and other related agency (e.g., Department of Labor) guidance is needed for various aspects of QSLP programs, including:
- employee certification guidelines,
- disclosure guidelines to employees,
- a model plan amendment,
- clarity around how QSLP matching contributions vest,
- whether the QSLP match can be subject to different investment elections than the regular employer match for participants who have both type of match,
- updated correction procedures for when QSLP match errors occur,
- guidance on privacy practices and procedures in connection with employee disclosures of student loan debt and
- nondiscrimination testing.
Next Steps for Plan Sponsors:
Here are some next steps for employers to consider who are interested in adding a student loan payment matching contribution to their plan:
- Evaluate Potential Participation in Program –
- Review employee demographics to estimate what proportion of the population may be interested in a student loan payment match.
- Poll employees to determine the interest level of providing student loan payment information in order to receive matching contributions.
- Forecast Cost – Model the potential cost of making the student loan payment matching contributions.
- Consider collecting data from employees (and consider doing so anonymously) to help determine how many employees anticipate that they will be making student loan payments that would qualify for the program and the amount of those payments.
- Review Nondiscrimination Testing Effect – Consider whether the retirement plan typically passes the annual nondiscrimination testing and the effect that adding a student loan payment match would have on the test.
- Assess Impact on Current Programs
- Review the employer’s other financial wellness programs and consider whether adding the student loan payment match would enhance or otherwise coordinate with those programs.
- Consider whether the student loan payment match would be a useful recruiting tool.
- Assess Need for System/Procedure Changes –
- Check with the plan’s service providers to gather insights and recommendations regarding how information from participants about student loans will be collected, maintained by the recordkeeper, and reported to the plan/plan sponsor.
- Consider what processes will be used to allow employees to (1) indicate that they wish to participate in the program, (2) certify that the employee has made qualified student loan payments and (3) document the amount of the payments.
- Consider Privacy Protection – Consider the method and level of privacy protection to apply to information provided by participants in the program.
- Amend Plan Document –
- Work with experienced counsel and the pre-approved plan sponsor, if applicable, to timely amend the plan.
- If the student loan payment match is offered during the 2024 or 2025 plan years, the deadline for amending the plan is the end of the first plan year beginning on or after Jan. 1, 2025 (2027 for governmental and collectively bargained plans).
- Determine Communication Strategy – Design a communication plan for communicating this new plan feature.
There are a number of open questions about how the QLSP match rules will work and how to administer this new feature. However, offering QLSP matching contributions may, over time, be employers’ go-to strategy for engaging debt-burdened employees in the retirement planning process.
[1] White Houser Announcement of Loan Forgiveness. ( https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/)
[2] Biden v. Nebraska, 600 U.S. ____(2023). See Scotus Blog, https://www.scotusblog.com/case-files/cases/biden-v-nebraska-2/
[3] U.S. Department of Education announcement, https://www.ed.gov/news/press-releases/fact-sheet-president-biden-announces-new-actions-provide-debt-relief-and-support-student-loan-borrowers
[4] The SECURE 2.0 Act of 2022 (Div. T. of Pub. L. No. 117-328) (“SECURE 2.0”).
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