November 28, 2023
How SECURE 2.0 Helps Balance Education and Retirement Savings
Financial planning is about setting goals and finding the right tools to achieve them. Sometimes it’s difficult to find the best way to achieve all of your goals, especially when monthly budget limits can create hard choices. For many people, that tension centers on two common objectives – repaying student loans and saving for retirement.
Fortunately, a provision in a federal statute known as SECURE 2.0, a.k.a. the second Setting Up Every Community for Retirement Act, which became a law in December 2022, was designed to help solve for that trade-off beginning in 2024. Tucked within SECURE 2.0 is a provision aimed at facilitating student loan repayments and matching contributions to an employer’s defined contribution retirement plan by allowing an employee’s student loan payment to serve as a qualifying contribution to receive the employer match into the employee’s retirement account. The provision also allows employers to add the matching contribution benefit to its plans as a way to attract and retain talented employees.
SECURE 2.0’s matching contribution provision applies to specific elective deferral retirement plans – 401(k), 403(b), 457(b) government plans, and SIMPLE IRAs. Each plan has two components, (1) elective deferrals made by an employee through payroll deductions and (2) matching contributions by the employer. The employer match is often thought of as “free money” because the employer makes the additions to an employee’s retirement account, usually stated in percentage terms. For example, an employer matches 100% of employees’ annual deferrals up to 3% of their compensation.
The purpose of SECURE 2.0’s matching contribution provision is straightforward. Employees self-certify the amount of their qualified student loan payments. Employers match that amount so that employees with student debt don’t miss the “free money” match if they don’t make elective deferrals. Total matching contributions would follow the employer’s retirement plan rules and cannot exceed the annual elective deferral limit set by the IRS. For example, in 2023 employees may defer up to $22,500 to a 401(k) plus an additional $7,500 if they are age 50 or older. In 2024, employees may defer up to $23,000 to a 401(k) plus an additional $7,500 if they are age 50 or older.
While the intent of SECURE 2.0’s matching contribution provision is clear, the Internal Revenue Service (IRS) needs to provide several details for its implementation. First, SECURE 2.0’s matching contribution provision does not provide a format for how employees must self-certify information about their student loan payments. Also, although § 221(d)(1)(A) of the Internal Revenue Code defines a “qualified education loan” as debt used to paSECURE 2.0 is a provision aimed at facilitating student loan repayments and matching contributions to an employer’s defined contribution retirement plan by allowing an employee’s student loan payment to serve as a qualifying contribution to receive the employer match into the employee’s retirement account.y for the qualified education expenses of “the taxpayer, the taxpayer’s spouse or any dependent of the taxpayer” it is unclear whether the matching contribution provision applies to Parent Plus loans in which parents borrow money to pay for their child’s education. (See 26 U.S. § 221(d)(1)(A).) Finally, the IRS should confirm that the matching contribution can be made to a Roth account if the employer has that option in its plan.
Although the implementation of SECURE 2.0’s matching contribution provision is not clear yet, the pending details should not deter either employees’ or employers’ plans. Through SECURE 2.0’s matching contribution provision, employees now have means to repay student debt and save for retirement and employers can offer a benefit to help them reach those financial goals.
Anna Hays
Senior Wealth Management Officer
Anna Hays is an attorney, Certified Financial Planner (CFP®) and Senior Wealth Management Officer with Cape Cod 5. She has over 25 years of experience developing estate and trust plans that integrate financial goals.
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