Outstanding student loan debt in the U.S. is more than $1.7 trillion. There’ve been attempts by the federal government to cancel certain loans—some successful; others not. Many with student loan debt say they’re struggling to make payments. Employers can help in some ways.
A previous blog mentioned that employers with 401(k) plans can now treat student loan repayments as elective deferrals for purposes of making employer-matching contributions. This is a way to allow employees with student loan debt who are unable to put their wages toward retirement to still build up retirement savings via employer contributions.
As of January 1, 2024, plans can allow for matching of qualified education loan payments (QSLPs). The IRS issued guidance on this matching feature. If your plan has this option, be sure you’re in compliance. If you’re thinking about adding this feature, understand all the ins and outs.
10 takeaways for employers to consider:
1. Matching option isn’t limited to 401(k).
Private-sector employers can use this matching option for SIMPLE IRAs. If a plan has an elective deferral feature in which employees contribute their salary to the plan—a salary reduction feature—then it can offer matching for student loan payments. Note: The guidance does not include SARSEPs as eligible plans even though they can accept salary reduction contributions if the plans were set up before 1997 (yes, there are still some in operation).
2. Matching isn’t mandatory.
A plan can choose to do so. If yes, then it must notify participants about this matching option.
3. Participant must certify their payments.
An employee participating in the plan must certify the amount of their payments. A plan may require a separate certification for each QSLP intended to qualify as such or permit an annual certification that applies for all QSLPs for the year. Certification must include (1) the amount of the loan payment, (2) the date of the payment, (3) that the payment was made by the employee, (4) the loan being repaid was used to pay qualified higher education expenses, and (5) that the loan was incurred by the employee. There is also an alternative certification option, such as registering the QSLP with the employer’s payroll.
4. Periodic matching.
The plan can make QSLP matches at a different frequency than matching contributions. But the frequency cannot be less than annually.
5. Matching is tied to the annual elective deferral limit.
This means that the most student loan payments taken into account in 2024 is $23,000. If a participant makes and elective deferral, then student loan payments taken into account are reduced accordingly.
6. Student loan repayments don’t reduce taxable compensation.
While elective deferrals are made on a pre-tax basis if contributed to the basic 401(k), compensation used to make student loan payments are still taxable. In effect, this compensation is treated the same contributions made to a designated Roth account with after-tax compensation.
7. Student loan payments aren’t limited to the employee.
If the employee is obliged to make payments for loans for a spouse or dependent, these payments count for employer-matching purposes. But loans for which the employee is merely a guarantor don’t count, unless the employee’s guarantee has been called into play. If an employee is a cosigner on an education loan, then the employee has a legal obligation to make payments, and this does count.
8. Student loans can’t be limited in type or purpose.
As long as a loan is an education loan, the plan can’t restrict payments to loans for a particular degree program, such as an MBA, or for attendance at a particular school.
9. There’s special nondiscrimination testing.
A 401(k) plan must satisfy the Actual Deferral Percentage (ADP) test, which requires that the deferral of income into the plan by highly compensated employees be proportional to that for non-highly compensated employees (i.e., nondiscriminatory). If the plan has a QSLPO match feature, a single ADP test can be used for all employees or apply a separate ADP test for employees who receive QSLP matches and a main ADP test that includes employees who do not receive QSLP matches. There are two methods (not explained here), either of which can be used, for a plan that applies a separate ADP test for employees who receive QSLP matches.
10. Mistakes don’t have to be corrected.
If an employee’s certification of a QSLP is determined to be incorrect, a match based on that certification does not have to be corrected and continues to be treated as a QSLP match. If the match is corrected, then all matches made under similar circumstances must be corrected. The IRS gives this example: An employee’s QSLP match for a plan year is corrected because the qualified education loan on which the QSLP match was based is later forgiven (causing the employee’s certification of a QSLP to be incorrect). All QSLP matches for the plan year must be corrected to the extent qualified education loans on which QSLP matches were based are later forgiven.
Final thought
As you’re deciding what to do about matching student loan payments, keep in mind that the IRS hasn’t released regulations yet. But for plan years beginning before January 1, 2025, you can rely on a good faith, reasonable interpretation of the law. Once regulations are proposed, there will be a period for making comments before final regulations are issued. Let’s see what happens.
Read more about helping employees with student loan debt in this list of blogs.
