With the expiration of COVID-19 pandemic relief suspending loan payments and interest accruals on federal student loans (interest accruals resumed September 1 and loan payments are set to resume in October), now is a good time for employers to take a closer look at the student loan matching contribution feature of the SECURE 2.0 Act of 2022 (SECURE 2.0).
As student loan payments resume, some employees may be faced with the difficult choice between making payments toward their student loans or contributing to their retirement savings. However, employers may be able to soften the blow by taking advantage of the SECURE 2.0 feature that permits employers to make matching contributions on certain qualified student loan repayments.
Secure 2.0: Student Loan Matching Contributions
SECURE 2.0 establishes rules permitting employers to make matching contributions to employees on the basis of qualified student loan payments.
Before SECURE 2.0, employers were not able to make true matching contributions on the basis of student loan payments due to certain technical 401(k) plan rules (i.e., the so-called "contingent benefit rule"). As discussed in a prior blog post, in 2018, the Internal Revenue Service (IRS) issued a Private Letter Ruling (PLR) permitting a student loan benefit program in which participants would receive a nonelective contribution to their 401(k) account on the basis of their student loan payments. However, the PLR approach did not permit true matching contributions, was somewhat complicated to administer, and uptake by employers was limited.
With SECURE 2.0, Congress established a formal mechanism by which employers can provide matching contributions to employees on the basis of their qualified student loan payments. This matching contribution feature is optional and is available to employers sponsoring 401(k), 403(b), and governmental 457(b) plans for plan years starting after December 31, 2023.
As described in more detail in our LawFlash, student loan matching contribution features must satisfy a number of rules and requirements. For example, only certain student loan payments for "qualified education loans" for an attendance at an "eligible education institution" (as those terms are specifically defined in SECURE 2.0) incurred by an employee for their own education or the education of a spouse or dependent can be matched.
In addition, there are limits on the amount of matching contributions, employees must certify their student loan payments at least annually, and there are other uniformity and nondiscrimination rules and requirements that apply.
What Can Employers Do Now?
The student loan matching contribution is one way for employers to attract and retain employees as it helps employees manage the tension between making student loan repayments and saving for retirement. Employers who are interested in adopting this feature for 2024 should start working with legal counsel, plan recordkeepers, and other providers now to establish the necessary processes and procedures to implement the program and to communicate it to employees.
If you have any questions or would like more information, please reach out to your Morgan Lewis contact or the authors of this blog post.