THE STUDENT LOAN DEBT PROBLEM AND EMPLOYER RESPONSE
Over the last two decades, the amount of outstanding student loan debt in the United States has grown exponentially. Studies suggest there are currently around 43 million Americans with student loan debt of more than $1.6 trillion. Paying off student loan debt has become a hot-button political issue, including with presidential candidates and members of Congress. Earlier this summer, the US Supreme Court’s decision in Biden v. Nebraska rejected the Biden administration’s plans for student loan debt relief. The Supreme Court held that the Higher Education Relief Opportunities for Students Act of 2003 did not authorize the secretary of education to cancel approximately $430 billion in federal student loan principal. This decision comes as the statutory pause on student loan repayments ended on September 1, 2023, a moratorium enacted in response to the COVID-19 pandemic and lasting over three years.
Managing student loan debt has become an increasingly significant issue for many workers. As a result, student loan debt presents a significant opportunity for employers. Student loan repayment programs can be a key factor in attracting and retaining talent. In a 2019 survey conducted by Gradifi, a student loan benefits provider, 70% of employees said they were likely to stay at their current jobs because a student loan paydown plan was available. Ninety-seven percent of employees reported being happier in their place of employment because of a student loan repayment program. Ninety-two percent of employees reported feeling an improvement in their stress because of their employer’s student loan repayment program. As a result, many employers are investigating new options to stay competitive and help their employees tackle student loan debt.
OPTIONS FOR EMPLOYERS TO PROVIDE TAX-ADVANTAGED STUDENT LOAN DEBT BENEFITS
Unfortunately, there are limited ways for employers to structure a program to provide student loan debt assistance that is not subject to immediate income tax. The current vehicles for providing student loan debt benefits on a tax-advantaged basis are:
Educational Assistance Programs
As part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), Congress amended Section 127 of the Internal Revenue Code (Code) to permit employers to pay up to $5,250 per year to employees for student loan repayments as part of an educational assistance program. Many employers utilize such plans to provide tuition reimbursem*nt for college or advanced degrees. Under the CARES Act, employers may also utilize these plans to provide student loan debt assistance.
To do so, employers must comply with the requirements of Section 127 of the Code, including:
- The employer must have a written plan document that lays out the terms of the program;
- The program must benefit employees or certain former employees who qualify under rules set up so that the program does not favor highly compensated employees;
- The program must not provide more than 5% of its benefits during any year for shareholders or owners (or their spouses or dependents) who own more than 5% of the stock or of the capital or profits interest of the business;
- The program must not allow employees to choose to receive cash or other benefits that would be included in gross income instead of educational assistance; and
- Eligible employees must be given reasonable notice of the program.
An educational assistance program provides a direct ability to pay off student loan debt through a basic but effective tax structure. Employers can make payments either to employees or directly to lenders. Many employers who offer student loan repayment benefits work with a third-party vendor because the employer does not want to be in the position of asking employees for sensitive financial information regarding student loan debt. Vendors often work with lenders either to pay off student loan debt directly or, if the employer provides direct payment to employees, to track or verify student loan debt payments so that the employer can be certain the payments are being used to pay off student loan debt.
The $5,250 limit is the combined limit for all educational assistance, including both expenses related to tuition reimbursem*nt and student loan debt payments. Under current law, the ability for employers to pay up to $5,250 per year to employees for student loan debt payments as part of an educational assistance program expires on December 31, 2025. However, it is often the case that employee benefit options enacted through the Code which are originally scheduled to sunset are extended indefinitely or made permanent. There is no guarantee, but it would not be surprising if the student loan debt payment benefit is extended or made permanent, particularly in the current environment where student loan debt receives significant media attention.
Contributions to Tax-Qualified Retirement Plans
In 2018, the Internal Revenue Service (IRS) released a groundbreaking private letter ruling (PLR) that helped to clear the way for employers to begin providing student loan repayment benefits as part of their 401(k) plans. The PLR confirmed that, under certain circ*mstances, 401(k) plan sponsors may link the amount of employer contributions made on an employee’s behalf to the amount of student loan debt payments made by the employee outside the plan. However, the PLR only applied to the specific plan sponsor requesting the ruling and did not address the effect on many other plan qualification requirements, such as the Code Section 401(a)(4) nondiscrimination requirement.
SECURE 2.0 codified the ability for certain defined contribution plan sponsors to provide employer-matching contributions based on employee payment of student loan debt. Effective for plan years after December 31, 2023, 401(k) and 403(b) plan sponsors can provide employer-matching contributions based on an employee’s “qualified student loan payments” made outside of the plan. A qualified student loan payment includes any payment made by an employee in repayment of a qualified higher education loan. The loan must be for the cost of attendance at an eligible educational institution.
SECURE 2.0 provided a helpful statutory framework for plan sponsors to provide matching contributions on student loan payments. Some of the most significant features are:
- “Qualified student loan payments” can include payments made by an employee for student loans made on behalf of the employee, the employee’s spouse or dependent;
- Plan sponsors are permitted to rely on an employee’s self-certification of qualified student loan payments, which certification must be made on an annual basis;
- Matching contributions on student loan payments must be treated the same as matching contributions made on elective deferrals concerning the match percentage, eligibility and the same vesting rules (though match frequency can differ);
- Plan sponsors may make the student loan match more frequently than annually (e.g., on a payroll period basis), but employees must have at least three months after the close of the plan year to claim the match;
- Qualified student loan payments are treated as available to all participants for purposes of the Code Section 401(a)(4) nondiscrimination testing requirements;
- Student loan payments can be treated as elective deferrals for safe harbor plan rules; and
- For purposes of the Actual Deferral Percentage (ADP) test, plan sponsors may separately test participants who receive matching contributions on account of qualified student loan payments.
OUTSTANDING QUESTIONS REGARDING SECURE 2.0 STUDENT LOAN EMPLOYER MATCHING CONTRIBUTIONS
While SECURE 2.0 provided the framework for the implementation of the student loan match, many open questions remain, and the US Department of the Treasury (Treasury) and IRS need to provide more guidance to fully implement this feature. Some specific areas where guidance would be helpful include:
- More guidance on what constitutes a qualified student loan payment. It seems clear that payment made by an employee toward a loan taken by an employee, employee’s spouse or dependent qualifies, but when is this determined? What if the employee’s spouse or dependent was a spouse or dependent when the loan was taken, but not when the loan payments are made (or vice versa)?
- What is required for a plan sponsor to establish reasonable procedures regarding annual self-certification? Separately, are there any limits on how much substantiation a plan sponsor can require if it wants to?
- If the match is allocated after the end of the year, can it be limited to active employees? Would this apply to safe harbor plans (which generally are not permitted to require service as of the last day of the plan year for employees to receive contributions) as well?
- How does the ability of employees to claim the match within three months after the end of the plan year affect the general requirement for non-safe harbor plans to correct ADP and Actual Contribution Percentage testing failures within two-and-a-half months after the end of a plan year to avoid an excise tax?
- How do the vesting requirements work? The student loan match must vest “in the same manner” as a regular match. How does this work if the plan has a fully vested safe harbor match plus a discretionary match subject to a vesting schedule?
SECURE 2.0 directs the Treasury to issue regulations to address these and other questions and establish reasonable procedures and deadlines for employees to take advantage of the student loan match benefit.
PLAN SPONSOR CHALLENGES IMPLEMENTING SECURE 2.0 STUDENT LOAN DEBT BENEFITS
In addition to the open legal questions, numerous other challenges exist for plan sponsors seeking to implement the SECURE 2.0 student loan matching contribution. Most significantly, plan sponsors need to assess their ability to implement a student loan benefit within the context of their existing 401(k) or 403(b) plan platform. The plan’s recordkeeper and third-party administrator must have systems set up to administer the student loan debt benefit. Due in part to the ongoing questions and lack of guidance, many recordkeepers have delayed the development of the systems set up to administer student loan debt benefits on a large scale beginning in 2024. Some have set up pilot programs to test the option for a handful of plans. Many recordkeepers and administrators are just starting to “pilot” their process and systems for 2024 before making the offering available more widely, which may be in 2025 or 2026.
Employers pondering a SECURE 2.0 student loan benefit should consider the following:
- Is the benefit right for your employee population? For some employers the answer is obvious: They either have a significant number of employees with college or advanced degrees for whom this issue is a high priority, or they do not. For others, it can be useful to assess the employee demographics to estimate the proportion of employees who may be interested in a student loan match. Some 401(k) recordkeepers are developing data and programs to help their clients make this determination. Some employers have utilized polls or surveys to try to determine employee interest.
- What is the potential cost? Employers can model cost projections based on expected participation rates. Some recordkeepers are developing data and programs to help their clients make this determination.
- Are there other, more effective ways to provide student loan debt benefits? For example, the CARES Act educational assistance program benefit discussed above is a relatively straightforward way to provide direct student loan debt benefits.
Although challenges remain, plan sponsors should keep in mind that plan design features are constantly evolving, and implementation issues always take time. Many retirement plan practitioners believe that it is only a matter of time before the student loan employer matching contribution becomes a commonplace feature within most employers’ 401(k) or 403(b) retirement plans.
