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SECURE 2.0 has brought many changes to the retirement space. Among them: student loan matching. This permissible and optional change is of great interest to many employers and plan sponsors, especially those seeking to attract and retain younger workers.
What’s the new rule in a nutshell?
SECURE 2.0 makes it significantly easier for employers to adopt student loan matching programs by treating “qualified student loan payments” as elective deferrals for purposes of employer matching contributions. This means the employer’s contribution that matches “qualified student loan payments” is actually counted as a match (instead of a nonelective contribution) and can be incorporated into a safe harbor match plan. Employers may begin implementing this option for plan years beginning after December 31, 2023.
What are “qualified student loan payments”?
SECURE 2.0 defines “qualified student loan payments” (QSLPs) as those: (1) made by an employee, (2) that repay a qualified education loan, (3) incurred by the employee, (4) used to pay for qualified higher education expenses. Only repayments up to the Section 402(g) limit on deferrals (or the employee’s compensation, if less) minus elective deferrals actually made may be taken into account. To break this down a bit further:
1. The payment must be made by the employee. This means that QSLPs do not include loans that have been forgiven, paid by a nonprofit or through a grant, paid by a family member, or paid by the employer as an employee benefit.
2. The payment must be made to repay a qualified education loan. This generally means a loan incurred by the employee solely to pay for qualified higher education expenses. Higher education expenses here must have been paid or incurred within a reasonable time before or after the loan was taken, and must have been used to pay for education furnished while the recipient was an “eligible student” (defined for this purpose as one enrolled in higher education carrying at least a half-time workload of study). This generally includes both expenses for an employee and expenses for an individual who was the employee’s spouse or dependent at the time the loan was incurred.
3. The loan must have been incurred by the employee. This means that it must be the employee that is liable for repayment. This can include instances in which the employee is liable for the education of a spouse or dependent (such as through a Parent PLUS loan or a loan in which the employee is a joint borrower). If the loan is not enforceable against the employee, it is not incurred by the employee.
4. Finally, the loan must have been used to pay qualified higher education expenses. This includes a wide range of expenses related to higher education, including things like normal tuition and fees, books, supplies, room and board, study abroad expenses and, for students with dependents, an allowance for daycare. This is generally limited to expenses for education at accredited public, nonprofit, proprietary, and postsecondary institutions.
How do employers verify this?
Employers may rely on an employee’s certification that he or she has made a QSLP. Employers must require such certifications at least annually. Practically speaking, employers may choose to require certification more frequently, and may also choose to require documentation reflecting the repayment in order to better administer the matching contribution.
What are some other plan requirements that must be in place?
Matching contributions made for deferrals and QSLPs should be made at the same rate. Employees can receive QSLP matching contributions only if they are otherwise eligible to receive matching contributions on deferrals—and all employees eligible to receive a matching contribution on deferrals should be eligible to receive a matching contribution on QSLPs. Matching contributions on QSLPs must vest in the same manner as matching contributions made on deferrals.
How does this impact testing?
Most importantly, the match on QSLPs can be incorporated into a safe harbor design —meaning that no additional testing would occur. For plans that are not safe harbor plans, the employer
contribution on QSLPs is counted as a match for purposes of the ACP test and the plan may perform ADP testing separately for those employees who received matching on QSLPs.
The Treasury will be issuing guidance on QSLP implementation in the future. In the meantime, now is a great time for plan sponsors to consider whether they want to add a QSLP provision. Plan sponsors considering inclusion of QSLPs should work with their TPA partner to discuss administration and begin to consider how to work through those administrative hurdles—including how to determine the amount of a QSLP match on an ongoing basis.
by Kelsey Mayo, Partner, Poyner Spruill