As of August 29, 2023, student loan payments have returned after a 3-year pause.
What does this mean for plan sponsors? As employees prepare to, once again, deal with the financial burden of student loans, sponsors have an opportunity to help lessen the load and ensure retirement contributions don’t fall by the wayside.
One way employers can do this is by implementing an optional change laid out by Secure Act 2.0. This provision allows employees to continue receiving retirement matching benefits from employers while forgoing retirement contributions to focus on repaying student loans. These payments would be treated as retirement contributions, meaning employers would match them based on the plan design features already in place. This provision wouldn’t cause any unnecessary extra work for sponsors. Employers can rely on an employee’s self-certification to ensure the loan payments are being made and can continue matching contributions based on the same vesting schedule. For most student debt holders, this provision could save years of lost retirement savings.
Not only does the implementation of this program benefit employees’ finances, but it can also be cost-effective for employers. First, the contributions being made under this provision are contributions that would have otherwise been made if the employee was still contributing to the 401(k). Therefore, this student loan aid approach is more cost-efficient than most other approaches. If the employer were to add an alternate student loan benefit program, it would result in additional costs for the employer. For example, student loan repayment dollars given directly to employees are still treated as taxable income, whereas 401(k) contributions are not taxable. Tax advantages like this are generally hard to come by within typical student loan repayment benefits.
As your employees get into the rhythm of student loan payments resuming, there may be a scramble to find ways to balance student loan payments with their current savings contributions. The adoption of this benefit would support employee participation in retirement plans, despite overwhelming student debt, and would serve as a competitive advantage when it comes to recruiting and attaining employees.
