IRS Issues FAQs on Student Loan Repayment Matching in Retirement Plans

What You Need to Know

The Secure 2.0 Act permits employers to match student loan repayments through retirement plan contributions.

The Internal Revenue Service has published question-and-answer style guidance on Section 110 of the Setting Every Community Up for Retirement Enhancement 2.0 Act, which permits employers to match their workers’ student loan repayments in the form of retirement plan contributions.

Under the landmark retirement reform legislation, known as the Secure 2.0 Act, employers were granted the option of treating employees’ qualified student loan payments as elective deferrals for purposes of an employer’s matching contribution program — even if the employee does not directly contribute to the retirement plan.

However, not all payments are eligible, so it’s important for employers to understand the details of what constitutes a qualified student loan payment. The new guidance is meant to help employers with such determinations, along with answering other common administrative questions raised by retirement plan sponsors.

Among the clarifications in the new guidance is the confirmation that, for a qualified education loan to be treated as incurred by an employee, the employee who makes a payment on the qualified education loan must have a legal obligation to make the payment under the terms of the loan.

The guidance also reiterates the basic definition of a qualified student loan payment, or QSLP, emphasizing that such a payment must meet the following criteria:

QSLPs must be made by an employee during a plan year 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;
The payment must not exceed, when aggregated with other such payments for the year, the section 401(m)(4)(D)(i) amount limitation for the plan year; and
The payment must be certified for the plan year by the employee in a manner that satisfies the section 401(m)(4)(D)(ii) certification requirement.

Borrowers and Co-signers vs. Guarantors

In general, the IRS clarifies, a co-signer has a legal obligation to make payments under the terms of a loan, but, unless the primary borrower defaults, a guarantor does not have a legal obligation to make payments.

Therefore, if an eligible employee is a co-signer on a qualified education loan for the employee’s dependent, both the eligible employee and the dependent may have a legal obligation to make payments.

However, only the individual who actually makes payments can receive a qualified student loan payment match.

Eligible Retirement Plan Types

The guidance confirms that a QSLP match feature may be added to a section 401(k) plan, a section 403(b) plan, a SIMPLE IRA plan under section 408(p), or a governmental section 457(b) plan.