SECURE 2.0 allows employers to match student loan payments in retirement accounts

Employees struggling with student loan debt may have a new way to save for retirement, thanks to a provision that Congress passed as part of a comprehensive retirement security package in December.

The provision allows for employers to make matching contributions to an employee’s 401(k) plan, 403(b) plan or SIMPLE IRA based on qualified student loan payments beginning in 2024. It’s one of more than 90 provisions included in the retirement security package, known as SECURE 2.0, which is set to bring a host of changes to the retirement industry.

According to Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, the provision will mostly benefit those with student loans who were not previously participating in their retirement plans, as “that’s really who it’s designed for.”

For plan sponsors that begin matching contributions based on student loan payments, Mr. Copeland said “it’s not a costly benefit they’re adding,” as they’re simply giving the match to those who were not participating in the plan before, or not contributing as much.

“It’s kind of a win-win situation for both employers and employees,” he said.

Abbott Laboratories was the first company to offer such a program in 2018, after receiving a private-letter ruling from the IRS allowing it to do so. Under Abbott’s Freedom 2 Save program, employees who put 2% of their annual salary toward student loan payments will receive a 401(k) contribution worth 5% of their salary — the equivalent of the company match.

“The whole idea behind the program was … we got your back, (and) you don’t need to choose between paying your loan or saving for retirement,” said Diego Martinez, divisional vice president for benefits and wellness at Abbott Laboratories.

Mr. Martinez said that for people first entering the workforce, saving for retirement may not be top of mind, but it’s important to start saving early. In addition to saving earlier, the Freedom 2 Save program allows employees to redirect money they would traditionally put toward their 401(k) into their student loans, he said, which helps employees pay off their loans more quickly.

According to EBRI’s Financial Wellbeing Employer Survey, conducted in June and July, 44% of employers surveyed said they were already offering 401(k) contributions tied to employee’s student loan payments. Mr. Copeland said it’s unclear exactly how these companies were offering such contributions, but the new provision “actually puts it into law” that they’re allowed to do so.

EBRI’s survey also found that 13% of employers said they plan to offer 401(k) contributions based on student loan payments in the next one to two years, and 19% said they’re not planning to offer it but are interested.

Mr. Copeland noted there are two costs of implementing the provision: verifying that employees who receive matching contributions are making their loan payments, and treating those employees separately in non-discrimination tests.

“It probably won’t be that costly, because a lot of that has been developed already for other uses,” he said.

The bill also directs the Treasury Department to produce regulations detailing how the provision will be implemented. For plan sponsors that are looking to start such a program, Mr. Martinez had a few tips.

“It’s very important to engage with your third-party administrator” to develop a plan for implementing the provision, he said. Mr. Martinez also highlighted the importance of clear communication with employees, especially for those just entering the workforce and joining a retirement plan for the first time.

Overall, Mr. Martinez said SECURE 2.0’s new provision allows employers “a different way to engage employees” in saving for retirement, asserting that “it’s worth it.”