What Secure Act 2.0 means for student loans

Secure Act 2.0, a bipartisan retirement package, was passed as part of the $1.7T spending bill at the end of 2022 and included one very important provision for people who have student loans: the ability for employers to make matching 401(k) contributions against employee student loan payments.

Not sure what that means? Not to worry! We'll break down what you need to know about how Secure Act 2.0 affects employees with student loans.

Read on to find out how Secure Act 2.0 impacts people with student loans, how  the match works, why this change matters, when this change will take effect, how Secure Act 2.0 works with an employer student loan repayments benefit, and more.

How does Secure Act 2.0 impact people with student loans? 

Section 110 in Secure Act 2.0 allows employers to treat employee student loan payments as “elective deferrals for the purposes of matching contributions,” beginning in 2024. 

Put differently, this means that employees with student loans are eligible to receive matching contributions to their 401(k), 403(b), SIMPLE IRA, or 457(b) plan (for government employees), even if they don’t contribute directly to their employer-sponsored retirement plans. As long as an employee is making his or her monthly student loan payment, companies can make a matching contribution to that employees’ retirement plan account.   

How does a match work? 

Before the passage of Secure Act 2.0, if a company offered a match on retirement account contributions, it might have worked something like this: 

• Under their company’s retirement plan, an employer would match 50% of an employee’s elective deferral each month, up to 5% of an employee’s gross salary. So if an employee contributed $100/month to their 401K and was eligible to receive a match, the company would contribute an additional $50 each month to the same employee’s 401K. If the employee’s annual salary was $100,000, the most the company would contribute annually to their 401(k) would be $5,000 (5% of $100,000), even if the employee contributed more than $5,000 to their retirement account each year.  

Of course, that’s just a simple scenario and not every company offers a match, but in general, companies that do offer a match will specify the details like the match amount, maximum match, and any eligibility criteria to receive a match in their individual retirement plans. 

The key thing to note is that, prior to Secure Act 2.0, if an employee was eligible to receive any match amount, that match would be made on the elective deferrals they made into their employer-sponsored retirement account–an elective deferral being the portion of an employee’s pay that they choose to have paid directly into his or her 401(k), 403(b), or similar plan account. If an employee wasn’t contributing to their employer-sponsored retirement account, they wouldn’t receive a match.

If an employee wasn’t contributing to their employer-sponsored retirement account, they wouldn’t receive a match.

After Section 110 of Secure Act 2.0 takes effect, if an employee has student loans, the company can make matching contributions into their retirement account, even if the employee is not making any contributions themselves. 

Revisiting the previous example of a company that offers a 50% match up to 5% of an employee’s gross salary, the Secure Act 2.0 policy changes mean that an employee who contributes $0 to his or her retirement account but pays $100 towards their student loan each month, could still receive a $50 monthly contribution to their retirement account from their employer in the future.  

Why does Secure Act 2.0 matter for student debt holders? 

Section 110 of Secure Act 2.0 could help student debt holders who previously couldn’t or wouldn’t save for retirement because of their student loans which, according to a 2019 TIAA-MIT study, is a significant majority (73%) of borrowers. 

If their company decides to offer a match on student loan payments, employees with student debt will be able to benefit from their company’s 401K match, even if they don’t choose to make elective deferrals themselves. 

When will the Secure Act 2.0 policies around student loans take effect? 

Starting Jan 1, 2024, an employee’s student loan payments can be considered an elective deferral and be used as part or all of the basis for an employer match. 

How does Secure Act 2.0 work with an employer student loan repayments benefit? 

Here at Highway, we’ve always said that an employer student loan repayments benefit is a great complement to an existing 401(k) plan. That’s true now, more than ever. 

Even with the Secure Act 2.0 changes, companies have the opportunity to eliminate a major source of financial stress for their employees much more quickly–one that not only impacts how employees save for retirement, but also delays multiple life milestones like getting married, having kids, or buying a house too. 

Helping employees pay down their student loans faster provides them with the financial flexibility to not only save more for retirement, but also save for major life milestones, pay down other forms of debt, and generally improve their overall financial health.

Helping employees pay down their student loans faster provides them with the financial flexibility to not only save more for retirement, but also save for major life milestones, pay down other forms of debt, and generally improve their overall financial health.

By offering a prescriptive employer student loan repayments benefit, companies can help save employees time, money, and stress related to student loans. 

Highway’s customizable and scalable approach to administering a student loan repayments benefit makes it simple for companies to verify employees’ student loans and student loan payments and to implement a flexible educational assistance benefit that will complement their existing retirement plan. 

‍Talk to our team today to find out how you can best help your employees tackle their student debt before Secure Act 2.0 takes effect.