Student Loan Payment Matching: 5-Step Guidance

Recent grads carrying student loan debt may not think retirement plan participation is doable for them. But if you offer a student loan payment matching program, that’s good news for their wallets and your plan participation rate.

Thanks to the Secure 2.0 Act, employees can make payments toward their student loans and have them be considered contributions to an employer-sponsored retirement plan.

That means if your company matches retirement plan contributions, these workers won’t leave money on the table while they’re digging out from their college debt. That can be just the motivation they need to sign up.

The IRS issued interim guidance for retirement plan sponsors that want to provide matching contributions to employees based on the employees’ education loan payments.

This new type of employer matching contribution applies to:

• 401(k)
• 403(b)
• 457(b), and
• SIMPLE IRA plans.

In Notice 2024-63, the IRS answered some questions employers have had since 2022. That’s when the Secure 2.0 Act amended the definition of matching contributions to include employer contributions made to a defined contribution plan on account of qualified student loan payments.

The interim guidance was released August 19, 2024, and is applicable for plan years beginning after December 31, 2024. So, it’s timely for employers that want to jump at the chance to offer a student loan payment matching program, in an effort to encourage retirement plan participation during open enrollment.

While the guidance isn’t final, it can be relied on, IRS stated in the notice.

Here are five highlights from Notice 2024-63 to get you started with this benefit that’ll appeal to Gen Z and other generations struggling to pay off education loans.

Helping Workers With Student Loans

1) Following general eligibility rules. The IRS laid out many requirements in its overview of employer matching on student loan payments.

One example: An employee’s payments in aggregate for a year can’t exceed that year’s retirement plan contribution limits reduced by the employee’s elective deferrals for the year.

2) Deciding on employee certification requirements. An employee must certify that a payment satisfies the requirement to be a qualified student loan payment.

A retirement plan can choose if it’ll require a separate certification for each payment or an annual certification that applies to all payments for that year.

Your company may decide to independently verify the:

• Amount of the loan payment
• Date of the loan payment, and
• Confirmation of the employee as payor.

Caution: The following items can be certified only through affirmative certification by the employee:

• The loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee’s spouse or the employee’s dependent, and
• It was incurred by the employee.

3) Establishing reasonable matching contribution procedures. Plans can determine their own administrative procedures for implementing the match feature – as long as the procedures are reasonable.

For example, when it comes to match claim deadlines, a plan might choose a single, annual deadline or multiple deadlines, such as quarterly.

4) Conducting special nondiscrimination testing. A plan can apply a separate actual deferral percentage (ADP) test for employees who receive student loan payment matches and a main ADP test for those who don’t.

In the case of a separate ADP test, the notice describes two methods for compliance with this type of nondiscrimination testing. They are:

• Method 1, which may be helpful if nonhighly compensated employees (NHCEs) who receive student loan payment matches have a higher deferral percentage than highly compensated employees (HCEs), and
• Method 2, which may be better if HCEs who receive student loan payment matches have a higher deferral percentage than NHCEs,

5) Dealing with miscellaneous details. IRS explains how a student loan payment matching program should be handled in some specific situations. Perhaps you’ve wondered if your retirement plan can allow qualified student loan payment matches to be contributed at a different frequency than elective deferral matches. The IRS notice verifies that’s permissible.

But the matching contributions for qualified student loan payments must be made at least once per year.