By Ilene H. Ferenczy, Esq.

With so many people in their 20s and 30s (and perhaps 40s) continuing to suffer financially due to overwhelming student loan debt, the SECURE 2.0 Act of 2022 (“SECURE 2.0”) contained a welcome change to assist these people in saving for retirement.  In particular, many people with outstanding student loans cannot afford to make salary deferral contributions on their own behalf to their company retirement plan.  This lost opportunity to save is bad enough in and of itself.  However, in plans with employer matching contributions, the participant is further disadvantaged because no participant deferrals means the participant is not eligible to share in the employer matching contributions and now falls further behind in saving for retirement.  A 2018 private letter ruling issued by the IRS in response to a clever idea by Abbott Laboratories found its way into Section 110 in SECURE 2.0.  Under this provision, for plan years beginning in and after 2024, an employer may agree to make matching contributions to its plan on behalf of employees who are making student loan payments, as if such payments were salary deferrals.  The IRS just issued guidance in relation to this new provision in Notice 2024-63 (the “Notice”).  The provisions of the Notice are effective for plan years beginning on or after January 1, 2025, with a “good faith, reasonable” interpretation of the law permitted for 2024.  As we are still in the 2024 plan year, it is worth noting that relying on the guidance in the Notice would satisfy this good faith, reasonable interpretation standard.

What Does Section 110 of SECURE 2.0 Permit?

Under this provision, an eligible employee may certify to the employer that they are making Qualified Student Loan Payments (“QSLPs”).  These QSLPs will then be matched in the plan in the same manner as salary deferrals are matched. This feature may be (but is not required to be) included as part of a company 401(k), 403(b), SIMPLE IRA, or governmental 457(b) plan.

What is a QSLP?

A QSLP is a payment made during the plan year by an employee in repayment of a qualified education loan (as defined in Internal Revenue Code (the “Code”) section 221).  A qualified education loan is indebtedness incurred solely to pay qualified higher education expenses for the participant or the participant’s spouse or dependents at the time it is incurred, and which expenses are paid or incurred within a reasonable time before or after the loan is taken, and which are attributable to education furnished during a period during which the recipient was an eligible student.  A qualified education loan specifically does not include loans given by a relative to the student or participant loans taken from a retirement plan.  Permissible expenses include tuition, fees, books, and supplies, as well as room and board for attending an educational institution.

The Notice requires that a participant must be legally obligated to make loan payments and must actually make those payments to qualify for the QSLP match.  This includes the borrower and a cosigner, but does not include a guarantor, unless the primary borrower has defaulted on the loan. Regardless of who received the education, only payments made by the participant qualify as QSLPs.

Are There Limits on How Much of a QSLP May Be Matched or on the Types of Student Loans?

The maximum QSLP eligible for matching is the loan payment the participant actually made for the plan year (or the participant’s total compensation from the employer, if less), up to the maximum deferral under Code section 402(g) [$23,000 for 2024] for 401(k) and 403(b) plans, the applicable deferral limit under Code section 457(e)(15)(A) [also $23,000 for 2024], or the maximum deferral under the SIMPLE IRA rules [$16,000, plus a catch-up of $3,500, for 2024].  (It is noteworthy that the statute only mentions catch-up contributions in relation to the SIMPLE deferral limit.  The implication is that QSLPs cannot take into account the increased deferral limits for catch-up contributions, other than in SIMPLE IRAs. A draft technical corrections bill would remedy this and take catch-up contributions into account for all types of plans.)  However, the QSLP limit is then reduced by any elective deferrals actually made to the plan by the participant.

Example 1:  Suppose Buster has compensation in 2024 of $50,000.  Buster makes $15,000 of student loan payments in 2024.  His maximum QSLP for plan purposes is $15,000.  Had Buster made loan payments of $25,000, his maximum QSLP is $23,000, the 402(g) limit.

Example 2:  Suppose Buster had also made $5,000 of salary deferral contributions to the plan for 2024.  The maximum QSLP for plan purposes would be $18,000 – i.e., the 402(g) limit of $23,000, minus his salary deferral contributions of $5,000.

The Notice does not address how a plan using a noncalendar plan year applies the maximum deferral limit.  The most conservative approach is to use the maximum in effect at the beginning of the plan year.

Only QSLPs made during the plan year are eligible for matching.

In What Way Must QSLP Matches be Nondiscriminatory?

The rules for matching contributions must be uniform between QSLPs and elective deferrals.  QSLPs must be matched at the same rate as deferral contributions, and all employees covered by the plan must have an equal opportunity to get QSLP matches.  Therefore, certain company divisions, locations, or job categories cannot be excluded from QSLP match eligibility (although union employees may be excluded).  The plan cannot have different limitations on QSLP eligibility than it does for other matches, such as requiring employment on the last day of the year for QSLP matches, but not normal deferral matches.  Finally, the plan cannot limit QSLPs to certain types of loans or education programs.  For example, a law firm cannot limit QSLP matches to those who are paying back loans for law school, but not for other degrees, or loans related to attendance at only certain specific schools.  Similarly, a plan cannot limit QSLPs to loans for just the employee’s education (as opposed to loans for spouse or dependent education).

Not every employee will have student loans.  The fact that some employees are, therefore, not eligible to receive QSLP matches, or if the proportion of HCEs that have student loans exceeds that of NHCEs will not create a benefits, rights, and features issue, so long as the QSLP matches are available to all.

Despite the fact that the rules for matching contributions must generally be the same for deferrals and for QSLPs, the employer is permitted to make matching contributions on a different frequency for deferrals than for QSLPs.  For example, the plan may provide for a payroll period match deposit for deferrals, but an annual contribution of matches for QSLPs.

What Should the Plan’s Procedures Be in Relation to the Match?

One of the key issues for QSLPs is determining when the participant must advise the plan that QSLPs have been made.  SECURE 2.0 directed the Secretary of the Treasury to issue regulations and noted that the regulations should permit employers to establish reasonable procedures, which could include an annual deadline for QSLP match claims “not earlier than 3 months after the close of the plan year.”

The three-month limitation on the claim deadline concerned many practitioners who understood that, to avoid incurring excise taxes in relation to a failed nondiscrimination test for matching contributions (i.e., the ACP Test), the correction must take place within 2½ months of the plan year. The ACP Test cannot be completed until the plan administrator knows all matching contributions to be made, including those for QSLPs.  As a result, it appeared from the statute that a plan with an annual QSLP certification deadline might be subject to excise taxes every time an ACP Test correction was needed.

The Notice, however, modulates this claims deadline requirement.  The Notice permits the plan to establish reasonable administrative procedures for QSLP matches, and then states, “An annual deadline that is three months after the end of the plan year is an example of a reasonable deadline.”  (Emphasis added.) This implies, of course, that the annual QSLP claim deadline may be sooner than three months … but it is unclear how much sooner. In a footnote, the IRS suggests that a plan could adopt “reasonable QSLP match claim deadlines that are earlier than 2½ months after the end of a plan year.” We understand that many service providers require plan sponsors to submit annual census data within 30 days of the end of the plan year to guarantee that testing will be done before the 2½ month excise tax deadline, a 30-day deadline for QSLP reporting may be desirable.  Whether this is acceptable to the IRS as a “reasonable deadline” remains to be seen.

If the plan provides for automatic enrollment, perhaps the safest course would be to meet the rules for an eligible automatic enrollment arrangement, which entitles the employer to correct an ACP Test failure within six months of the end of the plan year, enabling the three-month claim deadline for the QSLP.

How Does the Employee Certify the QSLPs?

The Notice requires that the employee certify to the employer that the loan payment is a QSLP.  This may be required for each payment that is made, or there may be an annual certification, which attests to the appropriateness of the year’s QSLPs.

The employee’s certification must include:

1. The amount of the QSLP(s);
2. The date(s) on which the QSLP(s) were made;
3. That the payment was made by the participant;
4. That the loan being repaid is a qualified education loan that was used to pay for qualified higher education expenses of the participant or the participant’s spouse or dependent; and
5. That the loan was incurred by the participant.

The participant must affirmatively certify items #4 and #5 above.  The employer may permit the employee to make this certification just once, which could be accomplished through the employee “registering” the loan with the employer (if the registration process includes the affirmation of these two items).  After registration, the employee can annually certify the first three items.  Alternatively, the employer can require a full certification of all five items every year.

Another means of certification is for the participant to register the loan with the employer, and then the employer may permit the employee to authorize payment of the QSLPs to the lender by payroll deduction.  This constitutes independent verification by the employer of the first three items in the list. In fact, the Notice provides an example in which the plan mandates payroll deduction for QSLPs to be counted for matching contributions.

Finally, the employee could register the loan with a third-party service provider that receives some or all of the information embodied by the first three items on the list, and then the provider notifies the employer of this information.  The third-party provider must advise the employee of the transmission of information (including a presumption that the payment was made by the participant) and allow the employee a reasonable opportunity to correct any information that has been transmitted in error. By giving the employee the opportunity to correct errors or disabuse the employer of the notion that he or she was the payor, the employer may presume that the information from the third party is correct – i.e., it has been passively certified by the employee.

How is ADP Testing Done?

The QSLP rules may encourage employees with student loans to refrain from making salary deferrals, which could, in turn, cause the ADP Test to fail.  The law provides for, and the Notice explains how, the ADP Test is adjusted to separately test those who make QSLPs.  The Notice provides two possible testing methods, and notes that these methods should help the plan to pass the ADP test regardless of the differing QSLP rates of HCEs and NHCEs.

Method 1:  Employees receiving QSLP matches are tested separately from employees without QSLPs, regardless of whether they make elective deferrals.  These employees are excluded from the “main” ADP test, which includes all other participants.  The Notice states that this method works best if the NHCEs who have QSLP matches generally have a higher rate of elective deferrals than the HCEs who have QSLP matches.

Method 2:  This is similar to Method 1, except that employees who make elective deferrals and have QSLP matches are included in both tests, but the deferrals are in the main test. This method would be preferable, according to the Notice, if the QSLP HCEs on average have a higher deferral percentage than the QSLP NHCEs.

Other Information in the Notice

Section E of the Notice provides information about two miscellaneous issues:  Q&A E-1 discusses the application of the QSLP rules to SIMPLE IRA plans.  There is also a Q&A dealing with any Section 409A implications for nonqualified plans that permit QSLP matches.

Q&A E-2 discusses the addition of QSLPs during the year if the plan is a safe harbor 401(k) plan.  The Notice provides that QSLPs may be added mid-year, so long as the notice and election opportunities required by Notice 2016-16 (which deals with mid-year amendments to safe harbor plans) are met.  In particular, participants must be advised of the amendment and given an opportunity to change their deferral rate as a result of the amendment.

Last, but not least, the Notice provides that, if it turns out that the employee’s certification was actually incorrect (for example, if a loan that is being repaid assiduously is later forgiven so that the payments made were not required), the QSLP matches do not need to be adjusted. However, the determination to adjust matching contributions or not must be done consistently for all employees. This elimination of the need to correct does not apply to operational failures in administering the match program.

Conclusion

Exactly how complex QSLPs will be to administer is, as yet, unknown, particularly for smaller plans.  It is also unclear how much employers want to get intimately involved with this financial concern of their employees.  Nonetheless, this can be a real boon for employees with oppressive debt, allowing them to save for retirement through employer contributions.

Love learning more about QSLPs?  Join Alison Cohen and Derrin Watson on ERISApedia for a webcast on this topic on September 17 at 2 p.m. EST.

If you have questions about QSLPs or any other new provisions of SECURE and SECURE 2.0, be sure to let us know.  After all, we are your ERISA solution!