“Should I prioritize paying off debt or investing for retirement?” It’s a common question facing young professionals. The frustrating answer they generally get from seasoned advisers is, “Both!” The reasons, of course, are obvious—eighty-sixing your debt will save you loads of money, while missing out on years of compounding interest can cost you loads of money. But how do you save when there’s barely a penny left after meeting monthly expenses?
If you’re facing this no-win situation because of student loans, Uncle Sam has a potential win-win solution for you: As of January 1, 2024, Section 110 of the SECURE 2.0 Act of 2022 allows your employer to match your student loan repayment with 401(k) contributions.
Here’s how the new student loan 401(k) match program works and how you can take advantage of it at your workplace.
The History of the Student Loan 401(k) Contribution Match
Many workplaces offer an employer matching program for 401(k) or other retirement accounts. In fact, the Plan Sponsor Council of America estimates that 98% of employers who offer a 401(k) also provide some sort of matching contribution. Generally, employers offer a full or partial match of employee contributions up to a maximum percentage of the employee’s salary.
In 2018, Abbott Laboratories requested an amendment to its 401(k) plan that would allow the company to match the student loan payments of employees as retirement account contributions. The IRS approved this amendment, making Abbott the first employer to offer 401(k) contributions that match employees’ student loan payments.
In 2022, the SECURE 2.0 Act used the Abbott blueprint to allow all employers with a 401(k) plan, 403(b) plan, or SIMPLE IRA to offer a similar match to their employees. Under this legislation, any employer can amend their retirement plan to allow for a student loan contribution match.
How the Match Works
There are several eligibility criteria and requirements for both employers that opt to amend their plans to include the student loan match and the employees who want to take advantage of the match. These criteria include:
Plan year of 2024 or later
Retirement accounts place a limit on how much you can contribute per year. For 2024, the contribution limit for 401(k) plans is $23,000, up from the $22,500 limit for 2023. Since the contribution limit is set by calendar year, the IRS asks you and your employer to delineate which plan year (i.e., 2023, 2024, etc.) a contribution or company match is going to. The option of offering the student loan match is only available for retirement plans that start on January 1, 2024 or later.
Window to claim the match
Even though retirement plan years are set by the calendar year, the window to contribute to your 401(k) does not close on December 31 of the plan year. You can generally contribute to your 401(k) until April 15 of the following year.
Employer matching programs are also required to have a similar extended window after the closing date of the plan year to claim the matching contribution. Employers must give interested workers at least three months after the closing date of the plan year to claim the matching contribution. For instance, if your employer’s 2024 retirement plan closes on December 31, 2024, your employer is required to give you at least until March 31, 2025 to claim your student loan contribution match.
Same rules as elective deferrals
Employee eligibility, match rate, and the vesting schedule must be the same for employees who are having their student loan payments matched as those employees who are making elective deferrals of their salary into their retirement account.
For example, if your employer offers a straight 3% match for elective deferrals, you would receive a dollar-for-dollar match of your student loan payments up to 3% of your salary. If you earn $100,000 annually and pay $500 per month to student loans, your employer would match your student loan payment with a 401(k) contribution of up to $3,000 for the year. This means six months’ worth of your student loan payments would be matched by your employer’s 401(k) contributions.
This is still a relatively small contribution compared to the 401(k) contribution limit of $23,000 for 2024. Also, it’s important to remember that employees taking advantage of traditional employer matching would have $6,000 contributed (their own $3,000 of elective deferral and the employer’s matching contribution). So even if your employer offers student loan retirement plan matching, you may want to also put away whatever else you can afford.
Qualified student loan payments (QSLPs)
Qualified student loan payments (QSLPs)
Employers may only offer the match for employees making QSLPs. Payments to federal or private student loans that were used for expenses related to enrollment at an eligible school will generally qualify. Notably, the legislation does not require employees to have graduated for their student loan payments to be eligible.
Annual certification of QSLPs
Employees who want to claim the student loan contribution match will have to annually certify their QSLPs to their employer. The certification process is up to the employer, which means it may vary. But it is likely that most employers will only require a statement or receipt of your payments to your lender for certification.
Will Your Employer Offer the Student Loan Contribution Match?
Since this type of contribution match is both voluntary and new, it will take some time to catch on among employers. As of late January 2024, only 5% of employers have implemented or begun the process of implementing this program.
Some employers may be hesitant because of the cost and complexity of implementing a new, voluntary program, while others may not have enough student loan borrowers among their workforce to make implementation worthwhile.
If your workplace has not adopted the student loan contribution match, it may be worthwhile to bring it up to your boss or human resources department. Despite the potential downsides of implementing the new program, there are a number of benefits that may convince your company, including:
- Attract and retain talent: This perk could be the difference between losing candidates or workers to other companies and attracting and maintaining a loyal workforce.
- Tax deductions: Like the 401(k) matches for elective deferrals, retirement account matches for student loan payments are tax deductible for employers. This means your employer may be able to increase their tax deductions by offering the student loan contribution match since many of their employees with student loans are either not contributing to their retirement account or not contributing enough to max out the match.
Have Your (Retirement) Cake and Eat It, Too
It may take some time to see widespread adoption of the student loan contribution match among employers. Start by letting your workplace know how much you want to contribute to your retirement while also paying off your student loans. Ending the stress of juggling competing financial priorities will benefit both you and your employer.
