As of December 2022, the US student loan debt burden stood at approximately $1.76 trillion. Student loan debt can hamper one's ability to save for retirement and achieve financial goals. Traditionally, those with an overwhelming amount of debt often find it challenging to contribute to a 401(k) plan and benefit from a 401(k) match from their employers.
Fortunately, all these have changed with the new SECURE 2.0 Act signed into law by President Joe Biden on December 29, 2022. The act allows employers to provide a 401(k) match to eligible employees making qualified student loan payments. Here's everything you need to know about the new legislation and the eligibility for a 401(k) match.
What is a student loan 401(k) match?
A student loan 401(k) match is a new feature that allows companies to pair student loan repayments with equal contributions to traditional 401(k) plans. The new legislation enables employers to treat payments employees make towards their student loan debt as if they were 401(k) contributions. As a result, it allows employers to make "matching contributions" to the employee's retirement plan account even though the employee didn't contribute to the plan.
How does a student loan 401(k) match work?
A student loan 401(k) match works similarly to the traditional employer 401(k) plan matching contributions. The specific details of how the program works vary based on the employer. However, the employer matches a certain percentage of the qualified employee's student loan repayments to a specified maximum amount.
For example, suppose your company provides a 2% 401(k) match, and an eligible employee makes at least that amount of qualifying student loan payments. In that case, that employee can receive your company's complete 2% 401(k) contribution.
Apart from a 401(k) plan, employers can also make student loan matching contributions to other retirement accounts, such as the 403(b) plan or SIMPLE IRA. In addition, government employers can also make matching contributions to a 457(b) plan.
Who is the 401(k) student loan matching program designed for?
A 401(k) student loan matching program can benefit employers wishing to attract and retain college-educated talent. It is designed for employees actively making payments to offset their student loan debt but with little discretionary income to contribute to their retirement plan.
What are the qualifying requirements for a student loan 401(k) match?
For an employee to qualify, they must satisfy the following criteria:
- The employee must be making qualified student loan payments.
- Your company must provide a 401(k) plan and a student loan matching contribution program.
- Employees need to submit loan repayment documentation to qualify for the program.
Benefits of a student loan 401(k) match
The following are some of the immediate benefits of a student loan 401(k) match program:
- Allow employees to start saving for retirement early: A student loan 401(k) match contribution allows employees to get help from their employers to initiate their 401(k) retirement plan contributions while paying down student debt. Instead of postponing their retirement savings to repay their loans, they get room to achieve the two goals simultaneously.
- Enhance financial wellness: Younger workers generally struggle with student loan debts compared to other generations. The Federal Reserve reveals millennials hold a cumulative $1.5 trillion in outstanding student loans, more than twice what baby boomers owe. Millennials also carry a higher credit card debt burden than other generations. It is not a surprise then that this generation feels financially stressed. Financial stress results in up to 14% of payroll costs in lost productivity and enhanced turnover. As more and more millennials take over the corporate scene, employers who offer employee student loan repayment as part of their benefits packages help improve the financial wellness of this crucial workforce.
- An excellent recruitment tool: Employers offering student loan repayment benefits often find it easy to attract top talent and demonstrate they care about their workforce. Participating in a student loan 401(k) matching contribution program can be a great way to attract and retain talent.
- Tax benefits: Another benefit employers get is maximizing new tax advantages to improve their bottom line. Employer student loan assistance is tax deductible to eligible employers. The IRS provides a guideline that outlines the eligibility requirements for an employer student loan repayment plan.
When can this be implemented?
The student loan 401(k) match program is effective for plan years starting after December 31, 2023. However, if you are an employer and think 2024 is too long to wait, consider incorporating a student loan reimbursement program.
A student loan 401(k) match program helps employees simultaneously pay their loans and create a handsome nest egg for their retirement. It significantly boosts achieving financial freedom and employees securing their overall well-being. The program also helps employers attract and retain talent and benefit from tax breaks. Talk to a Beacon Financial Advisor about whether this plan design feature suits your company and if there are other ways to improve your benefits offering to help boost your recruiting efforts.
This information is not intended as authoritative guidance or tax or legal advice.