- Some provisions in SECURE Act 2.0 are optional, where plan sponsors can adopt the provision in their discretion. Many of those provisions are opportunities to make plans more attractive or beneficial to employees.
- One such optional provision is the ability to match student loan repayments, which should be attractive to employers who hire college graduates.
- The provision is effective for plan years after December 31, 2023.
The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022—the “enactment date”.
SECURE Act 2.0 has over 90 provisions, some major and some minor; some are mandatory and some are optional; and some are retroactively effective and some won’t be effective for years to come. This series of articles will discuss the provisions that are likely to be the most impactful.
The first article was about Automatic Plans, a mandatory provision. That provision will, when effective, require that almost all new 401(k) and private sector 403(b) plans automatically enroll and escalate. It applies to plans established on or after December 29, 2022, but they don’t need to include the “auto” provisions until 2025.
This article discusses an optional provision that is likely to be very popular with some employers—the ability for employers to make matching contributions based on repayment of student loans (referred to as “Qualified Student Loan Payment” in the Act and as QSLP in this article). It is effective for plan years after December 31, 2023. Since most plans are on calendar years, the provision is effective for them in 2024.
The Senate Finance Committee’s summary of the Act describes the new provision (in Act section 110) as follows:
Section 110, Treatment of student loan payments as elective deferrals for purposes of matching contributions. Section 110 is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans. Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. Governmental employers are also permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan repayments.
The key considerations are:
- The provision isn’t effective until 2024.
- It is optional whether an employer wants to amend its plan to provide matching contributions based on repayment of student loans, QSLPs.
- This provision applies to deferral-based plans such as 401(k)s, 403(b)s, SIMPLE IRAs, and government plans (including 457(b)s).
- A plan must treat the QSLP matches the same as matches on participant deferrals.
- An employer can rely on employee certification of payment.
- A plan may, at its option, test the matching contributions as a part of its general discrimination testing or as a separate group consisting solely of those receiving matches as a result of payments on QSLPs.
- Other than for qualification testing, the student loan repayments are not treated as contributions to the plan.
- The IRS and Treasury Department are authorized to issue regulations that permit the QSLP matches to be made less frequently than regular matches, but not less frequently than annually. It is likely that the regulation will permit these QSLP matches to be made once a year for administrative convenience.
- The IRS and Treasury are also authorized to issue model plan amendments for QSLP matches.
This new opportunity will appeal to some employers, but not to others. For example, professional firms and other companies who hire large numbers of college graduates will likely adopt this provision as early as possible. It will message a concern for the benefit of those employees and an acknowledgement of their circumstances.
On the other hand, companies who primarily employ blue collar workers may not see a need to add this provision to their plans and to incur the resulting administrative complexity.
The next step is for service providers to develop the software, training and communications materials to recordkeep this new provision. Realistically, that will take some time to do. If those steps can be completed by the end of the third quarter of 2023, that would be ideal, since it would allow time to educate employers about the opportunity before the end of the year, so that the process is in place by January 1, 2024. If an employer decides to provide this option to its eligible employees, there will also need to be an employee education program before the start date of deferrals for QSLP matching.
Plan consultants and advisors should be educating their plan sponsor clients about this new opportunity. The initial focus should be on those employers who hire enough college graduates to make the effort worthwhile.
This is just one of the optional provisions in SECURE Act 2.0. Future articles will explore other impactful provisions. One characteristic of optional provisions is the need for plan sponsors to be educated about the new opportunities, and their advantages and disadvantages.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.
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