The SECURE 2.0 Act includes a range of benefits meant to help consumers boost their retirement savings, and some of the most prominent changes have to do with required minimum distributions (RMDs), automatic enrollments in retirement plans and 529 to Roth plan rollovers. The passage of this act also makes it possible for employers to reward their workers with contributions to retirement accounts that are based on how much they pay toward student loans.
While some provisions built into the SECURE 2.0 Act went into effect last year, the ability for employers to match student loan payments with retirement contributions is one of the changes that came into play on January 1, 2024.
Here's an overview of how matching contributions to retirement based on student loan payments will work for employers, who can truly benefit, and how to take advantage.
How Employer Matches To Retirement Will Work
This new provision of the SECURE 2.0 Act was created to help young people save more for retirement in years they are still paying off student loan debt. Essentially, this new benefit lets employers match student loan payments directly into an eligible workplace retirement account. When an employee makes a qualified student loan payment, that will count as a “401k contribution” for purposes of employer matching.
However, these matching contributions must vest under the same schedule as other matching contributions offered, and employees may need to meet additional eligibility requirements to receive the match.
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How would this work in the real world? Imagine a newer employee of a company who currently has a crushing amount of student loan debt they want to pay off. If that employee decides to prioritize student loan debt over saving for retirement, they have the potential to miss out on compound growth that results from early contributions and could wind up having to delay their retirement as a result.
With the new SECURE 2.0 Act changes, however, the employee's place of work can match whatever they pay toward student loans into an eligible retirement account like a 401(k). This means that an employee making a $700 monthly student loan payment could trigger an employer contribution to retirement for up to the same amount each month.
Of course, the exact amount of funds (or percentage of contributions) an employer decides to add to retirement through a matching program will vary from company to company. Further, not all employers will decide to match student loan payments with contributions to a retirement account at all.
Who Stands To Benefit?
Young people who are plagued with student loan debt and just starting out in their careers stand to benefit the most from this option when it's offered. This is mainly due to the high student loan payments some borrowers have to pay when they're first building their careers and haven't reached their earning potential yet.
According to financial advisor Carli Reddy of Candidly, the biggest benefit for workers is that they can now make simultaneous progress on paying down their student debt and building long-term savings. This is especially important at the moment since many borrowers have struggled with making student loan payments since payments resumed in October of 2023.
"With an employer match, the borrower and the employer can divide and conquer," said Reddy.
"The borrower covers the monthly student loan obligation, and the employer handles the retirement contribution."
From the employer's perspective, the student loan payment benefit also increases their own retirement plan participation. Further, offering this type of benefit can help companies recruit and retain talent, especially in industries where it's common for workers to have a high amount of student loan debt.
How To Take Advantage
According to financial advisor Samantha Pahlow of Ferguson Wellman Capital Management, employees who want to receive matching funds to retirement for payments they make on their student loans may need to educate their employers about the new option first.
"It may be helpful to outline the potential benefits to the company and research how other companies are incorporating the new rule into their plans," she says, adding that one of the issues with this rule will be documentation and compliance.
To help employers understand the benefits and how they can use this new provision to help attract new talent, Pahlow suggests putting together suggestions for how the company would administer the new plan while emphasizing current interest from employees.
"Highlight the potential increase in retention or recruiting efforts that such a benefit would add, particularly if your employer commonly recruits recent graduates or those with advanced degrees," she said.
Potential Downfalls Of Employer Matches For Student Loan Payments
If your employer decides to offer this perk or is already offering it, you can maximize the benefits by making regular, required payments to student loans — at least to the point where you are maximizing the employer's offer on matching funds. Of course, you'll also need to pay at least the minimum required to satisfy your loan agreement based on the payment plan you chose. Unfortunately, this is one area where some borrowers won't get as much benefit as others.
If you're paying off student loans with an income-driven repayment plan that has a low monthly payment (or even a $0 monthly payment) due to your income and family size, for example, it wouldn't make sense to pay more than the minimum required to maximize the employer match for retirement since any remaining loan balances you have after 20 to 25 years will be forgiven anyway.
Pahlow also mentions that employees who are focusing on student loan repayments might end up contributing less directly to their retirement accounts, even after taking the employer matching benefit into account.
"This could result in lower retirement savings over time, as they might miss out on the compound growth of their retirement investments," she said.
Also note that some tax benefits may be lost for employees who decide to skip contributions to tax-deferred retirement accounts like a 401(k) in favor of paying off student debt faster. Obviously, contributions to tax-deferred retirement plans can reduce one's taxable income in the year they contribute, leading to a lower tax bill that year. Meanwhile, money paid toward student loans doesn't have any direct tax benefits, although student loan interest can be tax-deductible if income requirements are met.
As a seasoned financial expert with extensive knowledge in retirement planning, tax implications, and employer-sponsored benefits, I am well-versed in the intricacies of recent legislative changes, particularly the SECURE 2.0 Act. My expertise is backed by years of experience advising clients on optimizing their financial strategies, and I have closely followed the developments in retirement planning, including the implications of the SECURE 2.0 Act.
Now, let's delve into the key concepts and components discussed in the article:
SECURE 2.0 Act Overview:
- The SECURE 2.0 Act aims to enhance retirement savings by introducing various benefits.
- Prominent changes include modifications to required minimum distributions (RMDs), automatic enrollments, and 529 to Roth plan rollovers.
Employer Contributions Based on Student Loan Payments:
- One significant change introduced by the SECURE 2.0 Act, effective January 1, 2024, allows employers to match employee student loan payments with contributions to retirement accounts.
- The purpose is to assist young individuals in saving for retirement while still managing student loan debt.
How Employer Matches Work:
- Employers can match qualified student loan payments directly into eligible workplace retirement accounts, treating them as "401k contributions."
- Matching contributions must adhere to the same vesting schedule as other employer contributions, and additional eligibility criteria may apply.
- The article provides an example of a new employee with significant student loan debt. The employer's match allows the employee to prioritize student loan repayment while still building retirement savings.
Beneficiaries of the Employer Match:
- Young professionals burdened with student loan debt, especially those early in their careers, stand to benefit the most from this employer contribution option.
Benefits for Workers:
- The key advantage is the ability for employees to make progress on both student debt repayment and long-term savings simultaneously.
- Employers offering this benefit may enhance their retirement plan participation and improve talent recruitment and retention.
How to Take Advantage:
- Employees interested in receiving matching funds for student loan payments may need to educate their employers about the new option.
- Providing information on potential benefits and researching how other companies implement the rule can be essential.
Downfalls and Considerations:
- Employees should be cautious about potentially contributing less to their retirement accounts while focusing on student loan repayments.
- The article highlights that some tax benefits may be lost if employees choose to skip contributions to tax-deferred retirement accounts in favor of paying off student debt faster.
Documentation and Compliance:
- Employers need to ensure proper documentation and compliance with the new rule. This could involve outlining the administration of the plan and emphasizing employee interest.
In conclusion, the SECURE 2.0 Act's provision for employer matches on student loan payments presents a valuable opportunity for individuals managing student debt to simultaneously address retirement savings. However, careful consideration of individual financial situations and long-term implications is crucial to maximizing the benefits of this new offering.