401K Matching for Student Loan Payments Finally Arrives

By Lake Moore, McAfee & Taft
May 4, 2023 - HR Daily Advisor

In this economic environment, employers are doing almost anything to attract and retain a quality workforce. Improving the suite of employee benefit offerings, sometimes without incurring major new expenditures, is top of mind for many.

Enter SECURE 2.0, which includes a long-awaited 401(k) feature that has sparked employer interest for years.

What Is It?

The new legislation lets employers treat an employee’s payments toward student loan debt as if they were 401(k) contributions.

Employers are permitted to make “matching contributions” into the employee’s plan account even though the employee didn’t contribute anything to the plan. This is a discretionary feature and isn’t required.

Why Add This Feature to Your Plan?

This could be a win-win for employees and employers. Employees are incentivized to pay down a potentially large student loan debt burden while simultaneously saving for retirement. Employees wouldn’t have to choose between paying down student loans and making 401(k) deferrals to receive the match.

For employers, although it might mean making a matching contribution when it otherwise wouldn’t (for example, if an employee chose to make loan payments rather than elective deferrals), it would almost certainly be a unique benefit offering, and the matching contributions are deductible in the same manner as a traditional match.

Only ‘Qualified Student Loan Payments’ Count

Matching contributions may only be made on account of a qualified student loan payment. This is defined as a payment made by an employee in repayment of a qualified education loan incurred by the employee to pay qualified higher education expenses.

The amount of student loan payments that can be matched can’t be greater than the normal Code § 402(g) limit for the year (for 2023, that’s $22,500) or reduced by any regular elective deferrals the employee makes during that plan year.

A qualified student loan payment generally must meet the requirements of Code § 221(d)(1). The loan must be obtained solely to pay qualified higher education expenses:

• Which are taken on behalf of the taxpayer, or his spouse or dependent, as of the time the debt was incurred;
• Which are paid or incurred within a reasonable period before or after the debt was taken on; and
• Which are attributable to education during a period when the recipient was an eligible student (which is a defined term).

It also includes loans to refinance loans that meet the above requirements. It does not include a loan from a relative or a loan from a retirement plan.

For verification, employers must have the employee certify, at least annually, that his loan payments were made to a qualifying loan.

What Are ‘Qualified Higher Education Expenses?’

These are generally expenses related to enrollment or attendance at an eligible post-secondary school. Very generally, it includes (1) tuition and fees; (2) books, supplies, and equipment; and (3) room and board. Other related items can potentially be included as well, like computers and internet service, but the expenses are only qualified higher education expenses if the student is enrolled at least part-time.

Although the rules for determining “qualified student loan payments” and “qualified higher education expenses” seem complex, employers are permitted to rely on the employee certification that the loan meets these requirements.

Employers would be wise to distribute information on these rules with the certification so employees can make an informed decision, but the requirements should be familiar since they are similar to those for the student loan interest deduction on employees’ personal tax returns.

As of right now, it appears that the employee certification is sufficient to protect the plan’s qualified status, but guidance from the IRS confirming that piece would be welcome.

Would This Hurt the Plan’s Nondiscrimination Testing?

No. Congress included special nondiscrimination testing rules to ensure student loan matches wouldn’t hurt testing.

Plans are permitted to test separately the employees who receive a regular match from those who receive a student loan match. More guidance from the IRS on this piece would also be welcome.

Are There Any Other Important Things to Know?

Here are a few:

• The matching contribution for student loan payments must be the same as for elective deferrals;
• Employees receiving the student loan match must otherwise be eligible to participate in the plan and receive a regular match;
• All employees eligible to receive a regular match must also be eligible to receive a student loan match;
• The student loan match must vest in the same manner as a regular match; and
• After the effective date, this feature can be implemented into 401(k), 403(b), SIMPLE IRA, and 457(b) plans (including plans sponsored by governmental employers). However, existing plans will almost certainly need to be amended before implementation.

When Can This Be Implemented?

This new feature can be effective for plan years beginning after December 31, 2024. For plans with a calendar year plan year, that means no sooner than January 1, 2025.

The IRS will most likely implement regulations to tighten up these rules closer to the effective date (and hopefully before).

What You Can Do Now

If 2025 is too long to wait, employers could consider implementing a student loan reimbursement program. Buried in the CARES Act from 2020, Congress expanded the rules for qualified education assistance programs.

Those programs typically reimburse employees for these same types of education-related expenses, but Congress expanded the program to also permit reimbursements for student loan payments made before January 1, 2026. An employer’s reimbursement of student loan payments can be made to the employee on a tax-free basis up to $5,250 per year.

There are various requirements under Code § 127 that must be met, however, before implementing a student loan reimbursement program. For example, employers should have a program document in place, and the design can be affected for employers that already have a qualified education assistance program in place.

Lake Moore is an attorney at McAfee & Taft.