SECURE 2.0’s student loan match 101 

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June 13, 2023
Student loan repayment obligations often limit employees’ ability to contribute to defined contribution (DC) retirement plans, causing these employees to miss out on employer matching contributions. Many employers have been searching for ways to help employees manage their student loan debt, including through DC plan benefits. The SECURE 2.0 Act of 2022 (Div. T. of Pub. L. No. 117-328) allows employers to treat an employee’s qualifying student loan repayments as elective deferrals or after-tax contributions for purposes of the plan’s matching contribution. For plan years starting after Dec. 31, 2023, employees in plans that offer this benefit will be able to receive the match, even if they don’t contribute to the plan. Although some employers started offering student loan benefits under their DC plans before SECURE 2.0, those benefits aren’t true matching contributions and create administrative complications that SECURE 2.0 largely alleviates. An employer’s interest in this new provision may depend on how many employees have student loan debt. However, agency guidance is needed to implement the new student loan match provision.

Qualified student loan payments eligible for match

Sponsors of 401(k), 403(b), and governmental 457(b) plans or savings incentive match plans for employees of small employers (SIMPLE plans) can make matching contributions with respect to employees’ qualified student loan payments (QSLPs) as if they were pretax, Roth or after-tax contributions. For plan years starting after Dec. 31, 2023, employers can offer the QSLP match to any employee eligible to participate in the DC plan, even if the employee isn’t contributing to the plan.

Debt must be for higher education expenses

A QSLP is an employee’s repayment of a “qualified education loan” for the higher education expenses of the employee, the employee’s spouse or an individual who was the employee’s dependent when the debt arose. The act’s requirement that the employee make the repayment may mean student loan payments reimbursed through an educational assistance program wouldn’t qualify.

Cap on QSLPs tied to elective deferral limit

An employee’s student loan payments can be treated as QSLPs to the extent the aggregate payments combined with the employee’s elective deferrals, if any, during a year don’t exceed the annual limit on elective deferrals under Internal Revenue Code (IRC) Section 402(g) (or if less, the employee’s Section 415 compensation). Section 402(g) sets the annual deferral limit ($22,500 in 2023), with additional catch-up contributions ($7,500 in 2023) allowed for employees ages 50 and older. Although SECURE 2.0 is silent on this issue, catch-up eligible employees presumably could receive a corresponding increase in the cap on QSLPs. For SIMPLE plans, the annual cap on student loans eligible for QSLP treatment is likewise tied to the annual SIMPLE deferral limit ($15,500, with an additional $3,500 for catch-up eligible employees in 2023), reduced by the employee’s contributions to the plan.

Limited treatment of student loan payments as deferrals. SECURE 2.0 limits the treatment of student loan payments as deferrals solely for purposes of a plan’s matching contributions. An employee’s student loan payments may not be treated as deferrals for any other purposes under the plan. For example, student loan payments don’t count toward a plan’s actual deferral percentage (ADP) test (see ADP/ACP testing below for more detail).

Annual certification required

To receive the match, an employee must annually certify to the employer that QSLPs have been made. SECURE 2.0 allows employers to rely on the employee’s certification without substantiation. However, the statute directs Treasury to issue regulations allowing employers to establish reasonable procedures for employees to claim the QSLP match. Those regulations could allow employers to require substantiating documentation.

SECURE 2.0 places one limitation on Treasury regulations addressing procedures for claiming the QSLP match: Employees must have at least three months after the close of the plan year to claim the match. This requirement effectively restricts employers to making the QSLP match on an annual basis, even if the plan’s regular match is made more frequently, such as on a payroll period or quarterly basis. (As noted below, Treasury regulations must allow an employer to match QSLPs at a different frequency than employee contributions.)

Terminated participants. Guidance is needed on participants who terminate employment before claiming the QSLP match. Department of Labor (DOL) regulations allow plans to apply reasonable allocation conditions on DC plan benefits. For example, plans can condition DC plan allocations on participants remaining employed through plan year-end. Could a plan condition its QSLP match on participants remaining employed through the QSLP match allocation date, even if that condition doesn’t apply to the plan’s regular match? In addition, Treasury regulations generally prohibit allocation conditions on matching contributions under a safe harbor plan. Does this mean safe harbor plans must allow terminated participants to claim the QSLP match? If so, must terminated participants have the same certification deadline as active participants? 

Deadline to claim match complicates ADP/ACP testing. The length of the period for employees to claim the QSLP match will complicate ADP and actual contribution percentage (ACP) testing for many nonsafe harbor plans. These plans generally must correct testing failures within 2-1/2 months after plan year-end to avoid an excise tax. However, plans offering a QSLP match won’t be able to complete their testing by this deadline because the final number of employees claiming the QSLP match for the year won’t be known until at least two weeks after the correction deadline. As explained below, the QSLP match will affect both the ADP test (because plans can run a separate ADP test for the QSLP match recipients) and the ACP test (because the QSLP match affects a plan’s average ACP). This complication shouldn’t affect plans with an eligible automatic contribution arrangement feature because those plans have six months after plan year-end to correct testing failures without incurring an excise tax.

QSLP match generally must mirror regular match

A QSLP matching contribution must meet the following requirements:

  • The plan must match elective deferrals and QSLPs at the same rate.
  • A QSLP matching contribution can only be provided to employees eligible to receive a match on their elective deferrals.
  • All employees eligible to receive a matching contribution on their elective deferrals must be eligible to receive a matching contribution on their QSLPs.
  • A QSLP matching contribution must vest in the same manner as the match on elective deferrals.

Match frequency can differ. Although the QSLP match generally must mirror the match on elective deferrals, SECURE 2.0 allows the two to differ in one way: They needn’t be made at the same frequency, as long as the QSLP match is made at least annually. This provision appears to accommodate plans that match elective deferrals more frequently than annually, e.g., on a pay period or a quarterly basis. (As mentioned above, employees will have at least three months after plan year-end to claim their QSLP match, essentially limiting employers to making the QSLP match annually.)

Discretionary matching contributions. Some plans provide for a discretionary match under which employers can decide each year whether to make matching contributions for the year, and if so, what the terms of the match will be for that year (e.g., how much the employer is willing to contribute and how that amount is allocated among participants’ accounts). Nothing in SECURE 2.0 suggests that QSLP matching contributions can’t be discretionary. However, if the plan’s regular match isn’t discretionary, then the QSLP match likely can’t be discretionary either.

Equivalent vesting schedules. IRS guidance is needed on the requirement for the regular and QSLP matches to “vest in the same manner.” This language suggests the matches must have identical vesting schedules. However, the statutory three-year cliff and six-year graded vesting schedules for DC plans are considered equivalent for nondiscrimination testing purposes. Could a plan apply three-year cliff vesting to the regular match and six-year graded vesting to the match on QSLPs?

QSLP match can be Roth. Before SECURE 2.0, employer matching contributions could be made only on a pretax basis. But now 401(k), 403(b) and governmental 457(b) plans with a Roth feature can let participants designate employer matching contributions — including the QSLP match — as Roth contributions. If a plan offers this election to participants, the election presumably should apply to both the regular and QSLP matches.

Nondiscrimination issues

A QSLP match must be available to all employees eligible for a match on their elective deferrals. For this purpose, the QSLP match is considered available to eligible employees, regardless of whether they have student loan debt. The QSLP match is also considered available to employees without student loan debt for purposes of minimum coverage testing under IRC Section 410(b) and benefits, rights, and features (BRF) testing under IRC Section 401(a)(4).

ADP/ACP testing

An employee’s QSLPs don’t count as elective deferrals for purposes of the ADP test. If the QSLP match leads to more nonhighly compensated employees (NHCEs) than highly compensated employees (HCEs) choosing to reduce their deferrals to the plan to pay off student loan debt, the plan’s ADP test results may suffer. However, SECURE 2.0 provides relief for these plans by allowing — but not requiring — the ADP test to be applied separately to the group of employees who receive the QSLP match. The statute doesn’t provide similar flexibility for the ACP test. However, separate testing might not be necessary for a plan that has more NHCEs than HCEs receiving the QSLP match, since this contribution is an actual match for purposes of the ACP test. This should improve the plan’s ACP results since more NHCEs than HCEs will receive a boost to their contribution percentages from the QSLP match.

If a plan has more HCEs than NHCEs receiving the QSLP match, the plan’s ADP tests should improve since more HCEs than NHCEs will likely be deferring at a reduced rate. A separate ADP test for the QSLP-match recipients might not be necessary in this case. However, the plan’s ACP test results may suffer if more HCEs than NHCEs receive a boost to their contribution percentages from the QSLP match. SECURE 2.0 provides no relief for this situation, so corrections may be necessary.

Plans with a discretionary match. As mentioned above, nothing in SECURE 2.0 suggests a plan with a discretionary match on elective deferrals or after-tax contributions can’t add a discretionary QSLP match. However, these plans may only be able to take advantage of the separate ADP testing option in years when the employer actually makes a QSLP match.

Safe harbor plans

QSLPs can be treated as elective deferrals for purposes of the safe harbor plan rules. This means a QSLP match can be a safe harbor matching contribution for purposes of the ADP and ACP safe harbors, including for both regular safe harbor plans and qualified automatic contribution arrangements (QACAs). QSLPs can also be treated as employee contributions under SIMPLE plans, under which an employer makes a safe harbor match on employee deferrals up to 3% of compensation.

Starter plans. SECURE 2.0 allows employers that don’t already sponsor a plan to establish “starter” 401(k) or 403(b) plans, which are safe harbor deferral-only plans with mandatory auto-enrollment. SECURE 2.0’s says QSLPs can count as deferrals under a starter 401(k) plan (but apparently not a starter 403(b) plan). However, why such a deferral-only plan would need to count QSLPs as employee deferrals is unclear.

Student loan ‘match’ benefits before SECURE 2.0

Even before SECURE 2.0’s enactment, some employers were offering student loan repayment assistance by contributing a “match” to the DC plan accounts of employees repaying student loans. But this benefit wasn’t a true matching contribution because the tax code allowed matching contributions only on an employee’s elective deferrals and after-tax contributions. Instead, the student loan matching contributions were made as nonelective contributions (referred to as “STU-NECs” in this article).

Implementing STU-NECs can create significant administrative complexity that many employers have been unwilling to assume. This complexity is largely driven by the IRC’s “contingent benefit rule” and might make STU-NECs incompatible with some safe harbor plan designs. By allowing true matching contributions with respect to QSLPs, SECURE 2.0 alleviates many of these complications.

Contingent benefit rule

The IRC’s contingent benefit rule prohibits directly or indirectly conditioning any benefit — other than matching contributions — on an employee’s decision to make or not make elective deferrals to the plan. A plan that provides for a STU-NEC in addition to regular matching contributions — with separate and independent limits on each benefit — shouldn’t run afoul of the contingent benefit rule. That’s because the sponsor makes the STU-NEC regardless of whether an employee contributes to the plan. However, to limit costs, some employers may prefer to place a combined limit on matching contributions and STU-NECs. That approach can create concerns about compliance with the contingent benefit rule.

Private letter ruling on contingent benefit rule. Scant legal guidance exists on STU-NECs. However, in 2018, IRS issued a private letter ruling (PLR 201833012) to a sponsor that added a STU-NEC to its 401(k) plan. The PLR addressed only one issue: whether the arrangement complied with the contingent benefit rule. Although IRS issued a favorable ruling, the PLR illustrates the inherent complexity of a STU-NEC design.

The plan provided for a matching contribution of up to 5% of compensation if an employee’s pretax, Roth or after-tax contributions equaled at least 2% of compensation. The employer added a STU-NEC feature that employees had to sign up for. An electing employee received a 5% nonelective contribution if the employee’s student loan payments during a pay period equaled at least 2% of compensation. If the employee also contributed at least 2% of compensation to the plan during the same pay period, the employee received the STU-NEC but not the match. If the employee failed to make a loan repayment equal to at least 2% of compensation during a pay period but contributed at least 2% of compensation to the plan, the employee received a true-up matching contribution. The regular matching contribution was made every pay period, while the STU-NEC and true-up match were made after plan year-end.

IRS ruled that this arrangement didn’t violate the contingent benefit rule because the STU-NEC would always be paid before the match as long as an employee made student loan payments. The STU-NEC wasn't conditioned on the employee’s election to contribute (or not to contribute) to the plan. However, this design required the plan to track which employees were (and weren’t) in the STU-NEC program. For employees in the program, the plan also had to track loan repayments each pay period to determine which benefit — the STU-NEC or true-up match — the employee should receive. IRS addressed only this one plan design in the ruling (which, like all PLRs, can be relied upon only by the employer that requested the ruling). Other designs could comply with the contingent benefit rule, but they would likely have to use a similar “STU-NEC first” approach.

Challenges for safe harbor plans. A significant drawback to the STU-NEC-first approach is that it may not work with plans that provide for safe harbor matching contributions. If the arrangement in the PLR discussed above were a safe harbor plan with a dollar-for-dollar match up to 5% of compensation (but otherwise the same as the plan in the ruling), the design might run afoul of certain conditions in the ADP and ACP safe harbors. For example, one safe harbor condition requires that the rate of matching contributions on behalf of any HCE must not exceed the rate for any NHCE who’s contributing to the plan at the same level. Under the STU-NEC arrangement, a NHCE who receives a 5% STU-NEC isn’t eligible for a matching contribution, even if the NHCE is deferring 5% of compensation. But a HCE who isn’t in the STU-NEC program and defers 5% of compensation receives the full 5% match.

A plan that satisfies the ADP safe harbor with a nonelective contribution (generally, equal to 3% of compensation) instead of a matching contribution can still satisfy the ADP safe harbor after adding a STU-NEC. But if the plan also provides for matching contributions and uses a STU-NEC-first design, the plan might not satisfy the ACP safe harbor. This is because the condition that no HCE receive a match at a greater rate than a NHCE deferring at the same level still applies.

Nondiscrimination testing

Since STU-NECs are nonelective contributions, they aren’t subject to ADP and ACP testing. Instead, STU-NECs must be separately tested for minimum coverage under IRC Section 410(b) and nondiscriminatory benefits under Section 401(a)(4). This isn’t the case for SECURE 2.0’s match on QSLPs, which is a true matching contribution that counts toward the minimum coverage and ACP tests for matching contributions.

STU-NECs can also have a negative impact on a plan’s ADP and ACP testing results. If employees receiving STU-NECs are largely NHCEs who reduce or stop their contributions to the plan once eligible for STU-NECs, the plan would have lower average deferral and contribution percentages for NHCEs than if those NHCEs were deferring and receiving the true match. As discussed above, this can also occur if a plan offers a QSLP match. However, SECURE 2.0 provides relief by allowing a separate ADP test for participants receiving the plan’s QSLP match and by treating the QSLP match as a true match that counts toward the ACP test.

Plan amendments

The plan amendment deadline for SECURE 2.0’s provisions is the end of the first plan year beginning on or after Jan. 1, 2025 (2027 for governmental and collectively bargained plans). This deadline applies to sponsors that offer matching contributions on QSLPs during the 2024 or 2025 plan years. For sponsors that first offer a QSLP match after the 2025 plan year, the usual discretionary amendment timing rule will apply: Amendments will be due by the end of the plan year in which the sponsor first offers the QSLP match. SECURE 2.0 directs Treasury to issue model amendments.

Employers that want to switch from offering a STU-NEC to a QSLP match may need to adopt two separate amendments: — one to implement the QSLP match and one to eliminate the STU-NEC. The SECURE 2.0 and discretionary amendment deadlines discussed above apply to the adoption of the QSLP match. However, a plan amendment eliminating a benefit like the STU-NEC generally must be adopted before the amendment’s effective date. 

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