IRS Issues Guidance on Retirement Plan Adjustment Based on Student Loan Payments

The IRS has issued guidance on a new taxpayer option created under SECURE 2.0 that allows employers to make matching contributions to retirement plans based on employee student loan repayments. The match amount is calculated as if the employee had contributed the loan amount to the plan, even if they had not made any voluntary contributions.

The reasoning behind the law is simple: People who repay student loans may not be able to save for retirement. That means they not only lose their retirement savings, but also their matching contribution. Under the new law, students can repay their student loans, and employers can treat those repayments as if they were retirement contributions for employer matching purposes.

Background

The SECURE 2.0 Act is a follow-up to the 2019 legislation that was heavily related to pensions, the SECURE Act. President Biden signed the SECURE 2.0 Act into law on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. The SECURE 2.0 Act made several changes to existing law, including:

• Automatic save. Starting in 2025, employers that start new retirement plans after December 29, 2022, will be required to automatically enroll eligible employees in their retirement plan—there are exceptions for small businesses with ten or fewer employees, start-ups, or religious and government institutions. However, employees are not required to participate and can opt out.
• Roth Account MatchesEmployers can change their existing plans to allow employees to receive matching contributions to Roth accounts — a change from the days when matching was only available on a pre-tax basis.
• RMD (minimum required distributions). SECURE 2.0 made a few changes to RMDs (required minimum distributions). Some of the changes were confusing — and the IRS was putting in some guidance. Last year, Notice 2022-53 noted that the final RMD rules wouldn’t take effect until the 2023 calendar distribution year. Notice 2023-54 added another year of relief, exempting from missed 2023 RMDs the ineligible designated beneficiaries of IRA owners who died in 2020 or 2021 after their required start date. And not to be outdone, Notice 2024-35 added another year of relief (you can read more about it here ).
• Qualified Charitable Distributions. Before the SECURE Act and SECURE 2.0, individuals age 70½ or older could make $100,000 per year to qualifying charities from their IRA—a contribution that could be counted toward the taxpayer’s required RMD. Starting in 2023, that amount is indexed for inflation. In addition, taxpayers age 70½ or older can now make a one-time election to make up to $50,000—indexed for inflation—from their IRA to a split-interest entity, such as a charitable trust.
• 529 Plans. Starting this year (2024), you can roll over any unused funds from your 529 plan to a Roth IRA without penalty. You can learn more here.
• Student loansImportantly, Section 110 of the SECURE 2.0 Act allows employers to make matching contributions toward employees’ qualified student loan repayments (QSLPs) under Section 401(k) plans, Section 403(b) plans, SIMPLE IRA plans, and government Section 457(b) plans.

Details

A QSLP is a payment made by an employee during a plan year to repay a qualified education loan taken out by the employee to cover qualified higher education expenses for the employee, the employee’s spouse, or a dependent.

An employee who makes payments on a qualified education loan must have a legal obligation to make payments according to the terms of the loan. Generally, a co-signer has a legal obligation to make payments according to the terms of the loan, but unless the primary borrower defaults on the loan, the guarantor has no legal obligation to make payments. If an eligible employee can be a co-signer for the employee’s dependent, both the eligible employee and the dependent may have a legal obligation to make payments according to the terms of the loan – but only the person making the payments can receive a QSLP match for those payments.

Section 221(d)(1) defines a qualified education loan as any debt incurred by a taxpayer solely for the purpose of paying qualified higher education expenses, subject to the terms of Section 221(d)(1)(A)-(C). Generally, this includes tuition and fees, books, supplies and equipment, and other necessary costs such as transportation. Room and board may be included, but certain limitations apply.

The student loan installment amount will be used to calculate the QSLP amount.

Limitations

The QSLP match may be for a 401(k) plan, a 403(b) plan, a SIMPLE IRA plan, or a government Section 457(b) plan. The amount of the match for a given year depends on the type of plan—the QSLP match must be based on the same formula used to match the employee’s salary-deferred contribution. For purposes of the annual limits, the employee’s student loan payments may be treated as a QSLP to the extent that the total payments combined with any employee deferrals during the year do not exceed the lesser of the annual voluntary Section 402(g) deferral limit or the employee’s salary.

Section 402(g) establishes an annual deferral limit ($23,000 in 2024) for 401(k) plans or similar plans operated by nonprofit and governmental employers — 403(b) plans, most 457 plans, and the federal government’s Employee Thrift Savings Plan — plus applicable match contributions ($7,500 in 2024) allowed for employees age 50 and older. For SIMPLE plans, the SIMPLE annual deferral limit is $16,000 in 2024, with an additional $3,500 match for eligible employees, less any employee contributions to the plan.

(You can read more about pension contribution limits for 2024 here.)

For purposes of calculating amounts, only loan repayments made during a plan year are eligible to be included toward the purpose of adjusting an employee’s QSLP for that plan year.

The plan may provide for QSLP adjustments to be made at a frequency different from deferred adjustments, provided that QSLP adjustments are made no less frequently than once per year.

QLSP matching must be uniform for all employees. This means that employees cannot be excluded from QSLP matching based on individual employer, business unit, department, location, or other similar basis.

The nondiscrimination principles have not been forgotten. QSLPs may be treated as optional deferrals for purposes of the safe harbor plan rules. A QSLP match may be added as a mid-year change to a safe harbor plan, provided the notice and election conditions (found in Notice 2016-16) are met. In addition, a mid-year change to a safe harbor plan to add a QSLP match feature will not be considered a prohibited mid-year change.

In addition, a QSLP match plan cannot contain provisions that limit the match to specific qualifying educational loans—such as loans for a specific course of study such as a bachelor’s degree, juris doctorate (law school diploma), or master’s of business administration—or to tuition at a specific school.

Jurisprudence

To qualify, the employee must certify to the employer that QSLPs have been completed each year. To meet the certification requirement, the employee must provide the following documentation:

1. loan installment amount;
2. loan repayment date;
3. confirmation that the employee has made the payment;
4. confirmation that the loan being repaid is a qualified education loan and was used to cover qualified higher education expenses for the employee, the employee’s spouse, or a dependent; and
5. confirmation that the employee took out a loan.

This may be accomplished through positive employee attestation (alternative methods, such as loan registration, may also be appropriate).

The plan may establish reasonable procedures that require independent verification that the employee has made payments during the plan year on a qualified education loan or passive certification by the employee. However, reasonableness is the name of the game – the plan may not establish independent verification or passive certification procedures that are not reasonably available with respect to a particular employee.

Oddities

There are some notable exceptions, primarily with respect to SIMPLE IRAs. For example, the QSLP match rules described in the IRS notice that address requirements that do not apply to SIMPLE IRAs (for example, the rules regarding the treatment of QSLP matches for purposes of nondiscrimination testing, including separate ADP testing) do not apply to the QSLP match feature of a SIMPLE IRA. In addition, an employee’s maximum QSLP for a year with respect to SIMPLE IRAs is determined differently than for other plans. An employee’s qualified education loan payments may be a QSLP in a SIMPLE IRA only to the extent that such payments do not exceed the annual limit, minus any other voluntary employer contributions elected by the employee for the year.

Section 409A may complicate a nonqualified deferred compensation (NQDC) plan that is related to a QSLP match plan. For purposes of the election timing and anti-acceleration rules, an employee’s action or inaction with respect to a QSLP will be treated as an action or inaction with respect to voluntary deferrals. The IRS expects to issue proposed regulations under section 409A that will be consistent.

More information

This notice applies to contributions made in plan years beginning after December 31, 2024, i.e. from 2025. (The Act applies to years after December 31, 2023.)

The IRS plans to issue proposed regulations that will provide further guidance, but in the meantime, plan sponsors may rely on the terms in the notice.

For more information, see IRS Notice 2024-63.

The IRS welcomes public comment. In particular, the IRS seeks feedback on:

1. Would additional guidance on passive certification or independent verification be helpful;
2. For a plan that provides for QSLP adjustments more frequently than annually, would it be helpful to provide guidance for an employee who receives a QSLP adjustment early in the year before it is known whether subsequent voluntary deferrals will reduce the employee’s maximum number of QSLPs for that year;
3. Would additional examples of reasonable procedures be helpful in the context of QSLP matches;
4. Would additional guidance on the application of QSLP rules to SIMPLE IRA plans be helpful; and
5. Would additional guidance on applying QSLP rules to SIMPLE 401(k) plans be helpful?

Comments must be submitted in writing within 60 days of publication in the Federal Register. Comments submitted after that date will be considered if they do not delay issuance of the proposed rule.

Comments may be submitted electronically through the Federal eRulemaking Portal at www.regulations.gov (to find this notice and submit comments, type “IRS Notice 2024-63” in the search box on the Regulations.gov home page).

Alternatively, you may mail comments to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2024-63), Room 5203, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

Comments may be posted publicly.

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