Student loan legislation continues to evolve, impacting both employers and employees with student loan debt. In this blog, we address two significant pieces of legislation ­– the SECURE Act 2.0 of 2022 (which is part of the larger the Consolidated Appropriations Act of 2023[1]) as well as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act[2], originally signed into law on March 27, 2020.

SECURE Act 2.0: Retirement Plan Matching Contributions for Student Loan Payments

On December 29, 2022, President Joe Biden signed the $1.65 trillion omnibus spending bill, officially called the Consolidated Appropriations Act of 2023 into law, which addresses numerous issues, including modernizing the employer-sponsored retirement plan landscape. These retirement plan provisions contained in the omnibus spending bill are referred to as SECURE Act 2.0 of 2023 (“SECURE Act 2.0”).

Currently, 401(k) matching contributions cannot be made based on amounts of an employee’s student loan payments. SECURE Act 2.0 has changed this, permitting employers to make matching contributions to their 401(k) plans on behalf of employees making “qualified higher education loan repayments,” which includes any student loan debt the employee incurs to pay for higher education expenses for themselves, though not for a spouse, child, or other family member. These new matching contribution options are effective for plan years beginning on January 1, 2024, and beyond.

Note that a qualified student loan payment is broadly defined under the Internal Revenue Code[3] as “any indebtedness incurred by the [employee] solely to pay qualified higher education expenses which are incurred on behalf of the [employee].”

Under the new law, employers may treat all student loan payments as elective deferrals, meaning that an employer can make matching contributions on these payment amounts. If an employer decides to include these matching contributions in their 401(k) plan, then they must comply with the following:

  • These 401(k) matching contributions are subject to the same vesting schedule as other matching contributions.
  • Employers can rely on an employee’s certification to ensure that student loan payments are being made.
  • For nondiscrimination testing purposes, employers may choose to test “student loan matching contributions” and other matching contributions separately, so that test results are not skewed.
  • Finally, employees may designate any student loan matching contributions as Roth contributions.

CARES Act: Expansion of Tax Savings on Student Loan Repayment Assistance

The CARES Act (2020) and the Coronavirus Response and Consolidated Appropriations Act (2021)[4] (the “Consolidated Appropriations Act”) both provided financial assistance to American families and businesses. While the CARES Act was signed into law on March 27, 2020, the Consolidated Appropriations Act (2021) was signed into law on December 27, 2020.

The Consolidated Appropriations Act continued many of the financial programs in the CARES Act while adding new guidance and updates regarding issues related to the COVID-19 pandemic, such as extending the tax benefit for employer-provided student loan payments[5] until January 1, 2026.

Specifically, the Consolidated Appropriations Act expands Internal Revenue Service Section 127, which addresses Educational Assistance Programs (“EAPs”), to permit employers to provide up to $5,250 per year in pre-tax benefits to employees (or a lender) to help pay for their student loans. Historically, EAPs were limited to educational expenses payments, such as those for tuition, fees, and textbooks. Note that under this new law, the $5,250 annual limit applies to tuition, fees, textbooks, and loan repayments combined.

The law allows employers to deduct these contributions as a business expense while allowing employees to exclude these amounts from their income, resulting in tax advantages for both employees and employers.

If employers want to establish a formal Section 127 education assistance program to provide this student loan benefit, they must adopt a written educational assistance plan document. Further,

  • The benefit must be an additional employer contribution (i.e., the program cannot provide eligible employees the choice between loan repayment and taxable income);
  • The program cannot favor highly compensated employees, and no more than 5% of the benefits can be provided to shareholders or owners;
  • An employee may not receive more than $5,250 from all employers combined; and
  • Employers must provide reasonable notification of the availability and terms of the program to eligible employees.

Both employees and independent contractors are permitted to participate in this expanded EAP. However, spouses or dependents of employees or independent contractors are not eligible to receive this expanded student loan repayment benefit, as a Section 127 EAP is not qualified under the Internal Revenue Code if it provides benefits to spouses or dependents.

Employer Actions

If employers would like to offer student loan benefits under either SECURE Act 2.0 of 2022 or the CARES Act (as amended by the Consolidated Appropriations Act (2021)), the employer should work with a qualified vendor or tax advisor to adopt the necessary plan documentation as well as to aid in administration of these benefits.

Additional Resources

  1. H.R. 2617, 117th Congress (2021-2022). Consolidated Appropriations Act, 2023. (2022, December 23). https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF
  2. H.R. 748, 116th Congress (2019-2020). Coronavirus Aid, Relief, and Economic Security Act. (2020, March 27). https://www.congress.gov/bill/116th-congress/house-bill/748
  3. 26 U.S.C. Section 221 (2021).
  4. H.R. 133, 116th Congress (2019-2020). Consolidated Appropriations Act, 2021. (2020, December 27). https://www.congress.gov/116/plaws/publ260/PLAW-116publ260.pdf
  5. Law, Emerald. Sequoia. [Updated] COVID-19 Stimulus Package Signed Into Law. January 7, 2021. https://www.sequoia.com/2021/01/covid-19-stimulus-package-signed-into-law/
  6. H.R. 2617, 117th Congress (2021-2022). Consolidated Appropriations Act, 2023. (2022, December 23). https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF
  7. H.R. 748, 116th Congress (2019-2020). Coronavirus Aid, Relief, and Economic Security Act. (2020, March 27). https://www.congress.gov/bill/116th-congress/house-bill/748
  8. H.R. 133, 116th Congress (2019-2020). Consolidated Appropriations Act, 2021. (2020, December 27). https://www.congress.gov/116/plaws/publ260/PLAW-116publ260.pdf
  9. Kiesewetter, Jenny. Sequoia. SECURE Act 2.0 of 2022: A Round-Up of New Retirement Plan Provisions. January 10, 2023. https://www.sequoia.com/2023/01/secure-act-2-0-of-2022-a-round-up-of-new-retirement-plan-provisions/
  10. Kiesewetter, Jenny. Sequoia. [Updated] IRS Grants Three-Year Extension for 401k Plans’ Adoption of CARES and SECURE Act Amendments. October 20, 2022. https://www.sequoia.com/2022/10/irs-grants-three-year-extension-for-401k-plans-adoption-of-cares-and-secure-act-amendments/
  11. Law, Emerald. Sequoia. [Updated] COVID-19 Stimulus Package Signed Into Law. January 7, 2021. https://www.sequoia.com/2021/01/covid-19-stimulus-package-signed-into-law/

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2023 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).

Jenny Kiesewetter — Jenny is a Retirement Plan Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline retirement plan compliance. In her free time, Jenny enjoys spending time with her friends and family, traveling, live music, and dining out.