Student Loan Payments – You Can Match on That!

Pension plans are a thing of the past and Social Security may not be enough to live comfortably on after retirement. Fortunately, the Revenue Act of 1978 introduced another way to save money for retirement, introducing the 401(k). The evolution of retirement savings and the 401(k) have been a saving grace for many individuals allowing them to put money aside for retirement. Their savings can also be increased if their employer offers an employer contribution in the form of a profit share or match. From my experience working in the retirement plan industry, an employer match is a commonly used incentive for employee retention and overall morale. But if an employee can’t afford to put money aside, they could be missing out on additional savings their employer offers!

Secure Act 2.0 made numerous changes in the retirement industry. One of those changes brought us the Qualified Student Loan Program (QSLP) that became effective for plan years starting on or after January 1, 2024. This optional provision allows employers to provide a matching contribution to eligible plan participants that are making qualified student loan payments. Many participants may be unable to defer into the plan due to repayment of student loan debt.

The idea of QSLP stemmed from a private letter ruling in 2017 filed by a global healthcare company that wanted to provide retirement benefits to their employees burdened by student loan debt. This benefit allowed employees to continue paying down their student loan debt while also increasing their retirement savings.

Plan sponsors that wish to make a match on loan repayments must first adopt the provision to their plan. This requires the plan document to be amended, and participants are provided with a Summary Material Modification (SMM) or Summary Plan Description (SPD). As of now, there is no formal language developed in pre-approved plan documents to accommodate for the QSLP provisions. However, the sponsor, in good faith, can still implement this benefit in their plan operations and adopt the provision to their document once the language is drafted.

For a participant to receive matching contributions on their student loan payments, the loan must be a qualified education loan incurred by the employee to pay for qualified higher education expenses. The word “incurred” is fundamental in determining the qualified status of the loan. The loan can be for the participant, participant’s spouse, and even the participant’s dependents (additional rules apply), but the participant must be legally required to make the loan payments to qualify for the match. Only payments made by the participant are eligible to receive the matching contribution.

Once it is determined the loan is qualified, the participant must certify the loan payments were made. This certification must include the amount of loan payments, date in which payments were made, confirmation that payments were made by the participant, proof the loan was used for qualified higher education expenses, and a statement the loan was the obligation of the participant. Various options are available for the participant to certify the loan payments.

The employer matching contribution is determined and calculated based upon the normal matching formula the employer has elected, using the annual loan payments as the participant’s “deferral” contribution. The loan payments eligible to be matched are limited to the annual 401(k) deferral limit, which is $23,500 for 2025. Once calculated, the match is deposited into the participant’s account just as the normal match would be and subject to the same vesting schedule if applicable. Any conditions to receive the employer match also apply to the student loan payment matching contribution.

There are various benefits to implementing the QSLP into a 401(k) plan. It provides an attractive benefit for the employer to recruit and retain employees, helps employees increase their retirement savings if they are unable to defer, and is a tax-deductible contribution for the employer! There are even nondiscrimination testing advantages that could benefit some plan sponsors if they are prone to failing those annual tests.

But like everything else, there are some drawbacks. There are questions regarding the operations and qualifications of the QSLP that the Internal Revenue Service (IRS) have not answered. The requirements of certifying the validity of the student loan payments can also increase the burden on the plan sponsor. I could imagine there would be additional tasks needed to update payroll appropriately.

Thankfully, QSLP are an optional provision for plan sponsors. I believe this type of benefit is useful and innovative, allowing retirement plan participants to pay down those nagging student loans but also creating a foundation for their retirement savings.

Additional guidance was released by the IRS in August of 2024 giving us a better understanding of the functionality behind the QSLP. The guidance provided more details on the qualifications in determining if a participant is eligible to participate in the QSLP, but I wouldn’t expect readers to want to delve into that from this simple article. If this is something that interests you, feel free to reach out to the Greenleaf Trust Retirement Plan Division for more details. We’re always happy to help our community understand the ins and outs of the retirement world.