Seyfarth Synopsis: On August 19, 2024, the IRS issued Notice 2024-63 (the "Notice") providing guidance for plan sponsors that wish to provide matching contributions based on eligible student loan repayments made by participants, rather than based only on elective deferrals, pursuant to the SECURE 2.0 Act of 2022. This post summarizes guidance under the Notice.
Section 110 of the SECURE 2.0 Act of 2022 codified rules that permitted plan sponsors to make a matching contribution to a 401(k), 403(b), SIMPLE or governmental 457(b) plan based on a participant's "qualified student loan payment," in addition to matching contributions on a participant's elective deferral contribution to the plan. These rules already took effect this year, and the IRS has now issued welcome guidance on how this provision should be implemented.
Qualified Student Loan Payments. The Notice clarifies what repayments may be matched as "qualified student loan payments." Specifically, a "qualified student loan payment" is one made by the participant on behalf of the participant, the participant's spouse, or a participant's dependent. In addition, the loan must be incurred by the plan participant to pay for qualified higher education expenses, which include tuition, fees, room and board, books, supplies and other necessary expenses related to enrollment or attendance in a higher education course of study.
Certifications. In order for a plan to match a qualified student loan payment, certain information about the loan and repayments under the loan must be certified to the plan. A one-time certification that the loan has been incurred by the participant (meaning the participant has a legal obligation to repay the loan) must be made. This certification may need to be updated if the loan is refinanced. Also, the participant must make annual certifications concerning loan payments, including the amount of the loan payment(s) made during the plan year, the date of the payment(s), and confirmation that the loan payment(s) were made by the participant, Certification may be made by the participant or by the lender's independent validation. A plan may establish a reasonable deadline for submitting certifications on loan repayments. For example, a deadline that is three months after the end of a plan year would be considered reasonable.
Matching of Repayments. Student loan repayments are subject to the same limits as elective deferrals for purposes of the match. So, only repayments up to the Code Section 402(g) annual limit, reduced by any elective deferrals made by the participant during the plan year, can be matched. Assuming the plan sponsor adopts this provision, generally all participants eligible for matching contributions on their elective deferrals must also be eligible for the match on qualified student loan payments. Plan sponsors need only make one matching contribution on all qualified student loan payments made each plan year, even if matching contributions on elective deferrals are made more frequently.
Special Nondiscrimination Testing Rules. Special testing rules permit a plan that adopts this provision to perform one average deferral percentage (ADP) test for all participants, or to perform separate ADP tests for those who take advantage of the student loan match provision. The Notice provides guidance on how to perform separate ADP testing in this context. The Notice also confirms that a qualified student loan matching program may be added to a safe harbor plan mid-year, provided that the applicable notice requirements are met.
The Notice applies to plans years beginning after 2024. So, if a plan sponsor has adopted this provision for the 2024 plan year, the plan sponsor may rely on a reasonable interpretation of Section 110 of SECURE 2.0.As with other SECURE 2.0 changes, the deadline to amend a plan to include this provision is generally December 31, 2026, and later for collective bargained and governmental plans.
The Notice provides useful guidance, and particularly with respect to what is a match-eligible student loan payment. As noted above, the loan must be "incurred" by the plan participant (i.e., the plan participant must be legally obligated to repay the loan), although the loan can be for the qualifying expenses of the participant's spouse or dependent (or, of course, for the participant). The guidance makes it clear that a student loan co-signer has a legal obligation to re-pay the loan, but a guarantor does not unless and until the actual borrower defaults on the loan repayments. As such, the certification (and any supporting documentation provided) must demonstrate that the participant is legally obligated to repay the loan. Although a plan participant may make loan repayments for his or her spouse or dependent, that doesn't necessarily mean the participant has a legal obligation to do so. This will need to be built into the certification process and can be done one time before the first loan repayment that the plan participant claims a matching contribution.
Historically, tuition reimbursement programs have been used to encourage employees (and sometimes family members) to further their education. Query whether a qualified student loan matching program will replace the need for an existing tuition reimbursement program.Given that the qualified student loan matching program has the advantage of furthering the participant's retirement savings, that just might be the case.
Employers will need to weigh this advantage with the additional administrative complexity of administering such a program, including its certification requirements and ADP testing decisions, along with a comparison of the cost of making matching contributions versus tuition reimbursement expenses, if any.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.