Tax-Advantaged Benefit Program for Student Loan Debt
October 10, 2023
Managing student loan debt has become an increasingly significant issue for many workers. As a result, employers are investigating new options to stay competitive and help their employees tackle student loan debt through student loan repayment programs which can be a key factor in attracting and retaining talent. There are two programs available to employers, Educational Assistance Programs, and Contributions to Tax-Qualified Retirement Plans.
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. Under the CARES Act, employers may also utilize these plans to provide tax advantaged student loan debt assistance.
Requirements under IRC Section 127
- The employer must have a written plan document that lays out the terms of the program
- The program must not favor highly compensated employees
- The program must not provide more than 5% of its benefits during any year for 5%shareholders or owners
- The program must not allow employees to choose to receive cash or other benefits income instead of educational assistance
- Eligible employees must be given reasonable notice of the program
Contributions to Tax-Qualified Retirement Plans
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.
Under SECURE Act 2.0
“Qualified student loan payments” can include payments made by an employee for student loans made on behalf of the employee, spouse or dependent.
- Plan sponsors are permitted to rely on an employee’s annual self-certification of qualified student loan payments
- Matching contributions on student loan payments must be treated the same as those made on elective deferrals concerning the match percentage, eligibility, and the same vesting rules
- 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
**Important note regarding contributions to Tax-Qualified Retirement Plans **
While SECURE 2.0 provided the framework for the implementation of the student loan match, as of this writing, many open questions remain, and the US Department of the Treasury and IRS need to provide more guidance to fully implement this feature. 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.