In a significant move for both employers and employees, the IRS has issued new guidance under Notice 2024-63, providing clarity on a groundbreaking provision of the SECURE 2.0 Act. This provision, which took effect in plan years beginning after December 31, 2023, allows employers to match their employees' student loan payments with contributions to their 401(k) or similar retirement plans.
The SECURE 2.0 Act of 2022 introduced a novel way for employees to boost their retirement savings. For the first time, employees can receive matching contributions to their retirement plans based on their student loan payments instead of just their elective contributions to the plan. This change applies to a variety of retirement plans, including 401(k), 403(b), governmental 457(b), and SIMPLE IRA plans.
How Does It Work?
Employers who choose to adopt this feature can now match the amount an employee pays towards their student loans with contributions to that employee’s retirement plan. The idea is to help those who might otherwise miss out on employer matching because they're directing their money towards paying off student loans rather than contributing to their retirement accounts.
For an employee to receive this benefit, they must meet certain eligibility requirements. The IRS guidance specifies that employees must certify that they have made eligible student loan payments to qualify for the matching contribution. Employers must also establish reasonable procedures to verify these certifications.
One of the key concerns with introducing new benefits is ensuring that they don’t inadvertently favor higher-paid employees over lower-paid ones. To address this, the IRS has provided special nondiscrimination testing relief for 401(k) plans that include these student loan matching contributions. This ensures that the plan remains compliant with IRS rules while offering this new benefit.
What’s Next?
The notice issued by the IRS is considered interim guidance, with plans to release more detailed proposed regulations in the future. However, employers can rely on this guidance as they begin implementing these new matching contribution options. The IRS is also inviting public comments on this notice, offering an opportunity for employers and other stakeholders to provide input before the regulations are finalized.
Why This Matters
This new provision could be a game-changer for many employees, especially those in the early stages of their careers who are juggling student loan repayments and trying to save for retirement. By offering a way to benefit from employer matching contributions even when prioritizing student loan payments, the SECURE 2.0 Act helps bridge the gap between debt repayment and retirement savings.
For employers, this is an opportunity to enhance their benefits package, potentially attracting and retaining talent, especially among younger employees who are often burdened by student debt.
As with any new regulation, it's crucial for employers to stay informed and ensure they are in compliance with the new rules. By understanding and implementing the guidance provided by the IRS, employers can offer a valuable benefit that supports their employees' financial well-being both now and in the future.
If you're an employer considering this option, now is the time to review the IRS guidance, consult with your plan administrator, and prepare to implement these changes in the upcoming plan years.