401(k) Match for Student Loan Repayments: What You Need to Know

In 2022, the student loan debt load in the United States stood at approximately $1.76 trillion. Student loan debt can hamper people’s ability to adequately save for retirement.

People across all age groups struggle to balance student debt and saving for retirement. A study conducted by CNBC and Acorns found that 81% of people with student loans have needed to delay important life goals, such as buying a home or retirement.

Americans may focus on repaying student debt over contributing to a retirement savings account, like a 401(k), but the Internal Revenue Service (IRS) has opened the door for employers to offer a new kind of benefit. While paying off your student loans, your employer might be able to make a matching contribution to your 401(k). A new law will also make this option more accessible to employers.

Employers Can Match Employee Student Loan Repayments with 401(k) Contributions

The IRS released a Private Letter Ruling (PLR) in 2018 allowing a specific employer to match employee student loan repayments with 401(k) contributions. The ruling allows that employer to make a 5% matching contribution to eligible employees’ 401(k)s. The employees must make a 2% payment toward their student loans during the same pay period.

This ruling only applies to one specific employer, but it has allowed other employers to follow suit and pursue their own PLRs.

The ruling clarified that the employer’s 401(k) matching proposal would not violate the “contingent benefit” prohibition, which bans employers from making other employee benefits contingent on 401(k) elective deferrals.

Tax Benefits for the Employer

Employers can offer student loan repayment programs as a recruiting and retention tool.

The money offered through these programs is considered taxable. Employer 401(k) matching for student loan repayment offers a tax advantage over this approach to employer support for loan repayment. Contributions that employers make to employee 401(k)s are not taxable.

The SECURE 2.0 Act

The Securing a Strong Retirement Act (SECURE 2.0 Act) builds on the work of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that became law in December 2019. The sweeping 2.0 law includes a provision that allows employers to adopt programs that match 401(k) contributions with employee student loan repayment. The SECURE 2.0 law specifies that vesting schedules for matching contributions for employee student loan payments be the same as all other matching contributions.

The SECURE 2.0 law will ease employer compliance concerns. Without this law, employers had to work with the IRS on an individual basis to establish this kind of employer program for 401(k) matching for student loan payments.

The SECURE 2.0 legislation had strong bipartisan support. It was signed into law by President Biden on Dec. 29, 2022, as part of the Consolidated Appropriations Act (CAA) of 2023.

The Bottom Line

Before the SECURE 2.0 Act, employers that wanted to pursue 401(k) matching for employees repaying their student loans needed to work with the IRS to determine if they can launch that kind of program. With the SECURE 2.0 Act becoming law, all employers will have the option to offer this benefit.