The IRS Releases Much-Needed Clarification Regarding Student Loan Matching Contributions to Retirement Plans Under the SECURE 2.0 Act

On August 19, 2024, the Internal Revenue Service (“IRS”) released Notice 2024-63 which offers clarification on the requirements for employer-matching contributions to retirement plans for qualified student loan payments (“QSLPs”). 

SECURE 2.0 Background

QSLPs were introduced by the SECURE 2.0 Act of 2022 (the “Act”) and are permitted for plan years beginning on or after January 1, 2024.  The Act allows employers to make matching contributions under a 401(k), 403(b), SIMPLE IRA, or governmental 457(b) plan for employees making QSLPs, even if the employee makes no elective deferral contributions to the plan.

A QSLP is an employee’s repayment of an education loan for qualified higher education expenses. The maximum QSLP per year for 401(k) and 403(b) plans is the amount equal to the annual contribution limit (or, if lesser, the employee’s compensation), reduced by the employee’s elective deferrals for the year. The annual contribution limit for 2024 is $23,000 for employee contributions.

Example: Melissa, aged 25, participates in her employer’s 401(k) plan which matches QSLPs and salary deferrals. In 2024, Melissa defers $13,000. If Melissa makes $12,000 of QSLPs in 2024, only $10,000 ($23,000 – $13,000) of those repayments can be matched.

*It is important to note that different rules apply to SIMPLE IRAs and 457(b) plans.

The Act provides that a matching contribution relating to a QSLP will be respected as such provided the plan meets the following requirements:

• Matching contributions on elective deferrals are offered at the same rate as matching contributions on QSLPs;
• Matching contributions on QSLPs are only made on behalf of employees otherwise eligible to receive matching contributions on elective deferrals;
• All employees eligible to receive matching contributions on elective deferrals are eligible to receive matching contributions on QSLPs; and
• Matching contributions on QSLPs vest in the same manner as matching contributions on elective deferrals.

Key IRS Clarifications Under Notice 2024-63

The IRS clarified a number of key questions left unanswered by the Act, including:

• A QSLP is a payment made by an employee in repayment of a qualified education loan incurred by the employee to pay for qualified higher education expenses of the employee, the employee’s spouse, or the employee’s dependent.
• Plans may not limit QSLP matches to only certain qualified education loans (such as for an employee’s own education or a particular degree program).
• A QSLP match must be based on a qualified education loan payment made during the plan year.
• An employee must certify, with specific information, that a payment satisfies the requirements to be a QSLP. Plans may require each payment to be certified or allow an annual certification.
• A separate actual deferral percentage (“ADP”) test may be applied for employees receiving QSLP matches, apart from the main ADP test that includes other employees not receiving QSLP matches. Alternatively, employees may be tested together.
• A QSLP match feature may be added as a mid-year change to a safe harbor plan.
• A plan may provide that QSLP matches are contributed at a different frequency than elective deferral matches, as long as such QSLP match contributions are contributed no less frequently than annually. Relatedly, employers can require that an employee be employed on the last day of the plan year to receive a QSLP, provided such requirement also exists for the plan’s elective deferral match.

The IRS’s guidance applies for plan years beginning in 2025, but a plan sponsor may rely on a good faith, reasonable interpretation of the Act prior to this date.  That said, it remains to be seen whether third party administrators and recordkeepers will be capable of adding these QSLP features to qualified plans before 2025.

Employers that wish to offer QSLPs under their defined contribution plans will need to amend their plans to permit QSLP matching contributions and should consider implementing processes for receiving and reviewing employee certifications.  

For more information on QSLPs and how plan sponsors can take advantage of this new employee benefit, please reach out to our Benefits team.