By Mark Olsen, Managing Director at PlanPILOT
For a large percentage of today’s young workers, student loan debt continues to be a significant financial burden. Even with efforts by the federal government to ease loan burdens through forgiveness proposals, student loan payments are impacting the ability to move forward with their lives and financial goals. Specifically, surveys indicate that younger professionals and other workers are less willing or financially able to contribute to their employer-sponsored retirement plans, due to the high student loan payments they need to make each month.
Fortunately, employers now have a tool to help. A little-known provision in the SECURE 2.0 Act allows employers to make contributions to an employee’s retirement plan account that match the student loan repayments made by that employee each month or year. This allows the employee to both continue to make timely payments to reduce and pay off their student loan debt and grow their retirement accounts (through their own and employer matching contributions) at the same time.
Why Are Early Retirement Plan Contributions So Important?
In a word: compounding. Many studies demonstrate the importance of starting retirement contributions early in life. Early contributions allow the magic of compounding earnings in a retirement plan to grow more over a longer time period before retirement withdrawals begin. If younger workers delay starting or contributing to their employer plan accounts, they may have less favorable alternatives to build their retirement assets (e.g., saving more later on, deferring retirement and working longer, or compromising potential retirement lifestyle spending).
Advantages to Employers
Competition for talent is acute for employers. According to Bureau of Labor statistics, employees changing jobs has continued to increase since 2008. In 2023, 44 million workers quit their jobs and 3.4 million did so in January 2024 alone. Yet, hiring has still outpaced job changes, indicating employees (especially young employees) are seeking better opportunities and more attractive company benefits.
Logically, offering an employer benefit that potentially addresses a young job candidate’s chief financial concern (i.e., how to save for retirement while paying off higher-education debt) could be a key factor in attracting and retaining young talent. A higher employer match based on a young employee’s retirement plan contributions may not matter much to the job candidate if they’re unable to contribute to the plan in the first place.
Employers may also benefit from the goodwill generated by recognizing and providing a potential solution to a large societal and financial problem. Helping younger workers boost retirement savings while reducing debt can alleviate employee stress and financial concerns and promote job satisfaction and talent retention. Today’s younger generations are also looking at companies who demonstrate they care about their employees as people, not just workers.
How the Benefit Works
Employers who sponsor 401(k), 403(b), and governmental 457(b) plans or SIMPLE plans can make matching contributions to an employee’s retirement account if the employee is making regular qualified student loan payments (QSLPs) as long as the employer’s plan treats student loan payments the same as normal elective deferrals for match rates, vesting, and eligibility purposes. At present, employees must certify to their employers they are actually making student loan repayments and employers are allowed to rely on such certification without substantiation. Further refinements and regulations are likely forthcoming.
Qualified student loans are those loans utilized for qualified higher-education purposes (such as tuition, fees, room and board, etc.) as defined by IRC Section 221. The annual limit, including salary deferral elections, would be the same as allowed by the annual elective deferral limit.
Example: Maureen, age 35, participates in an employer-sponsored 401(k) retirement plan that matches QSLPs as well as salary deferrals. The 2024 salary deferral limit for employees under age 50 is $23,000; Maureen defers $14,000 from her salary to her retirement plan. If she also makes $11,000 of QSLPs in 2024, only $9,000 ($23,000-$14,000) of those repayments can be matched by her employer.
There are other preliminary rules that must also be followed. Since this benefit is relatively new to both employers and employee participants, careful discussion with recordkeepers and TPAs is essential, as well as providing proper and thorough education to employee-participants.
Utilizing Professional Assistance
Implementing new aspects to a retirement plan can present significant challenges to a plan sponsor, especially when considering the complexity of choices, fiduciary duties and responsibilities, and avoiding liability issues. You also want to facilitate a smooth implementation process and “get it right the first time” to foster confidence with your participants.
At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.