Match for Student Debtors
Art by Brian Scagnelli
Employers that sponsor savings-based plans such as 401(k)s and who employ college graduates will want to know more about the SECURE—for Setting Every Community Up for Retirement Enhancement—2.0 Act provision that permits matching contributions for eligible employees who are paying off their qualifying student loans. Plan advisers can help plan committees understand and implement this new opportunity. And the time to study it is now, because, if the change is implemented January 1, 2024, plans should inform employees about it before the end of this year.
Here are six things plan advisers should keep in mind:
1) Qualified student loan payments. The new provision applies to matching contributions for “qualified student loan payments,” made by employees eligible to make deferrals to the retirement plan. A QSLP is payment for indebtedness incurred by the employee solely to pay for that person’s qualified higher education expenses. Even though the employee does not actually contribute to the plan, the QSLPs are treated as if he had deferred those amounts to it. The QSLP “deferrals” are subject to the annual dollar limit that otherwise applies to elective deferrals. Plan sponsors have the option of matching QSLPs once a year after the year ends, vs. on a payroll basis, and it is likely that most will do that.
For plan sponsors that implement this provision, there could be a significant increase in the number of participants receiving matching contributions, namely employees who have not been deferring because of their student loan obligations but who will want to receive QSLP matching contributions. Plan committees will need to consider this cost—i.e., the additional matching contribution—in determining whether to implement the provision.
2) Employee certifications. The plan sponsor can rely on an employee’s certification that QSLPs were made. This is good news, and advisers should make sure plan committees know they don’t need to verify the payments. Recordkeepers will likely be preparing election forms to help implement this.
3) It’s not just for 401(k) plans. QSLP matching contributions can be offered under a range of deferral-based plans, including 401(k)s, 403(b)s, SIMPLE IRAs [savings incentive match plan for employees individual retirement accounts] and 457(b) governmental plans. Advisers should discuss this new feature with their client plan sponsors and committees.
4) Participant education. Advisers can work with clients’ recordkeepers to help the committees educate participants about the new matching opportunity and how and when they may take advantage of it. This could be done during enrollment meetings and through communication materials.
5) Discrimination testing. Plans have the option to test QSLP matching contributions either as part of the plan’s general discrimination testing or separately. As a result, the QSLP matching contributions should not adversely affect a plan’s discrimination testing. Advisers can help the committees work with their plan’s recordkeeper on a best approach.
6) The provision is optional. This new QSLP matching provision is not mandatory. The decision to add it is a “settlor” function—i.e., a plan design decision—and not a fiduciary act under the Employee Retirement Income Security Act. Therefore, it may be made in the best interest of the company. For instance, plan sponsors that primarily employ blue collar workers may not see a need for this provision and its administrative complexities and decide to do without it.
Next Steps
In sum, plan sponsors should consider whether they need this provision to help recruit and retain college-educated workers. For sponsors that want to add the match for 2024, advisers can offer instruction and help them coordinate implementation with the recordkeeper. But some sponsors may prefer to wait a year or two to allow time for the systems and educational materials to be developed and implemented.
More Compliance to Consider
The Opportunity to ‘Rothify’ Employer Contributions
The SECURE 2.0 Act, which builds on the Setting Every Community Up for Retire- ment Enhancement Act of 2019, allows plan sponsors to give participants the option to treat matching and nonelec- tive employer contributions as Roth contributions. This feature is optional for both plan sponsors and participants. If a sponsor does provide the option, and a participant opts to use it, the employer contributions will be taxed through to the participant. However, when the money is withdrawn, it will be tax-free, as will earnings if held in a Roth account for at least five years.
Advisers can assist plan sponsors in deciding whether this change will benefit the employer and help its partic- ipants by considering the following:
Education. If the provision is adopted, the adviser can instruct the partici- pants about the tax treatment of Roth contributions. This option may appeal especially to participants who expect to retire in a higher tax bracket. In effect, Roth treatment is a tax arbitrage or a “bet” on higher tax rates in retirement. And there are other advantages, such as the ability of Roth accounts to avoid the required minimum distribution rules. Participants need to be educated about these considerations so they can make informed decisions about whether Roth is right for them.
Full vesting. The Roth option can be offered only where employer contributions are fully vested. This makes the feature less attractive to plans with a vesting schedule. So, if a plan fully vests its matching contributions, but not its nonelective—i.e., profit sharing—only the matching contributions could be Rothified. Advisers can help plan sponsors understand these nuances.
Administration. The Roth feature may be offered this year; yet doing so may be impractical. Payroll and record- keeper systems will need modification, and communication materials will need to be created before a sponsor can realistically make the option available.
Financial Incentives to Encourage Plan Participation
SECURE—for Setting Every Community Up for Retirement Enhancement—2.0 permits 401(k) and 403(b) plan spon- sors to offer incentives for employees to join the employer plan or to increase their deferrals. Allowed will be “gamification” for these plans as of plan years starting after December 29, 2022, or January 1, 2023, for calendar year plans, and will likely be effective in increasing participation and deferral rates.
Advisers should educate plan committees about the option and the conditions for avoiding plan disquali- fication. The qualification issue arises because the Internal Revenue Code prohibits any financial benefit, other than a matching contribution for an employee’s deferrals to a plan; however, this new rule amends that provision to permit the incentive if the following is met: The employee who is offered the incentive must be eligible to make deferred contributions under the plan; the financial incentive may not be paid for with plan assets, though the sponsor may pay for it; the financial incentive must be a non-cash gift or award; and the incentive must be “de minimis.” While not defining the incen- tive, the Senate Finance Committee report uses as an example a low-dollar gift card. The IRS will probably issue guidance on the maximum allowed.
This new incentive will likely appeal to sponsors that already use gamifica- tion—e.g., in wellness programs—and that don’t want to use automatic enroll- ment. Advisers can educate the sponsor and committee about this new option.
Joan Neri is counsel for Faegre Drinker’s financial services ERISA practice in Florham Park, New Jersey.
Fred Reish is chairman of the financial services ERISA practice at Faegre Drinker in Los Angeles.