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The Secure 2.0 and Student Loans - RMC Group

Written by RMC Group | Feb 8, 2023 2:59:25 PM

As we recently reported, on December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023, which funds the government for the fiscal year that began on October 1, 2022.  Embedded in that legislation, as Division T, was the SECURE 2.0 ACT of 2022 (the SECURE Act 2.0).  The final version of the SECURE Act 2.0 reconciled separate bills passed by the House and the Senate during 2022.

The SECURE Act 2.0 includes over ninety provisions designed to enhance the retirement savings of American workers.  Some of its provisions take effect immediately.  However, most do not become effective until plan years commencing after December 31, 2023, or even later.

In addition, some of the provisions are mandatory, and some are permissive.  One of the provisions that becomes effective for plan years beginning after December 31, 2023, and is permissive, is Section 110 of the SECURE Act 2.0, which permits employer matching contributions to a defined contribution plan based on student loan payments.

Student Loan Contributions

Congress has recognized that many workers are unable to contribute to 401(k) plans because they are making student loan payments instead.  And, because they are unable to contribute, they are ineligible for employer matching contributions.  This is a double whammy.  Not only are they unable to save for their retirement through pre-tax, elective deferrals to a retirement plan, but they do not get the benefit of their employer’s matching contributions to the plan.

Section 110 of the SECURE Act 2.0 seeks to address this problem.  It amends section 401(m)(4)(A) of the Internal Revenue Code, which defines the term “matching contributions”, by adding clause (iii), which says that:

The term “matching contribution” means—

(iii)      subject to the requirements of paragraph (14), any employer contributions made to a defined contribution plan on behalf of an employee on account of a qualified student loan payment.

This means that an employer can make matching contributions to a 401(k) plan based on an employee’s qualified student loan payments, even if the employee is not otherwise contributing to the plan.  The term “qualified student loan payment” is defined in section 401(m)(4)(D) of the Code as:

. . . a payment made by an employee in repayment of a qualified education loan (as defined in section 221(d)(1) incurred by the employee to pay qualified higher education expenses . . .

And, section 221(d)(1) of the Code defines the term qualified education loan as ”. . . indebtedness incurred by the taxpayer solely to pay qualified higher education expenses . . .” for the taxpayer, the taxpayer’s spouse or any dependent of the taxpayer.

Helping Younger Employees Save for Retirement

The changes made by section 110 of the SECURE Act 2.0 should help younger employees begin saving for retirement.  It takes mandatory payments that they have to make – student loan payments – and treats them as elective deferrals for purposes of employer matching contributions to defined contribution plans.

This means that employees, who are overburdened with student debt, will still be able to benefit from their employer’s matching contributions to the plan.

As stated above, the provisions of section 110 of the SECURE Act 2.0 are effective for plan years beginning after December 31, 2023.  However, this provision is permissive.  No employer is required to make matching contributions to a 401(k) plan.

In order to encourage employers to make matching contributions for qualified student loan payments, the SECURE Act 2.0 permits an employer to rely upon an employee’s self-certification of such payments.  This means that an employer is not required to ask for any specific evidence or documentation of qualified student loan payments, which will result in more simple and less expensive plan administration.

For more information on retirement plans and students loans, contact RMC Group today to speak with a Retirement Planning Specialist. Our office can be reached at 239-298-8210 or rmc@rmcgp.com.

Click here to read about previous updates on Secure 2.0 and Student Loans.