Viewpoints co-authored by Tom Mirra and Nitin Jain
Are you one of the estimated 45 million Americans still holding student debt?
It is no surprise that younger employees often do not participate in their employer’s 401(k) plan due to the financial burden of having to pay off their higher education loans. Outstanding student debt of $1.7 trillion is a problem that affects 45 million Americans nationwide.
An estimated one-third of all 401(k) plan participants have outstanding student loans with an average monthly payment of $500.
When you add this amount to the cost of rent, food, utilities and other living expenses, many younger individuals are unable to participate in their company’s 401(k) plan and therefore miss out on their company’s matching contributions.
With the recent passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act 2.0, as part of the Consolidated Appropriations Act of 2023, student loan payments may now be treated as 401(k) elective deferrals for purposes of company matching contributions.
As an example, a common 401(k) employer matching formula is 50 cents on a dollar up to six percent of an employee’s pay. Using this matching formula, an individual earning $50,000 a year with a six percent deferral of salary contributed into a 401(k) plan would result in a $3,000 salary-deferred 401(k) contribution and a $1,500 employer matching contribution.
The new law would allow companies to make 401(k) or 403(b) matching contributions based on employees’ “qualified student loan payments” – even if the workers do not contribute directly to their own 401(k) plans.
A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses.
This provision will be effective for contributions made for plan years beginning January 1, 2024, but it is not expected to be automatic. We anticipate high levels of interest in this area and are awaiting additional guidance from the Treasury Department on the implementation of the SECURE Act.
EPIC will keep you updated as we learn more.
EPIC offers these opinions for general information only. EPIC does not intend this material to be, nor may any person receiving this information construe or rely on this material as, tax or legal advice. The matters addressed in this article and any related discussions or correspondence should be reviewed and discussed with legal counsel prior to acting or relying on these materials.
