Starting on January 1, 2025, American workers can benefit from a groundbreaking provision of the SECURE 2.0 Act: the 401(k) student loan match program. This initiative allows employees to pay down their student loan debt while simultaneously building their retirement savings, a welcome relief for many burdened by significant educational debt.
What is a 401(k) student loan match?
The 401(k) student loan match is a new program under the SECURE 2.0 Act, designed to help employees who are managing student loan debt. Under this program, employers can make matching contributions to an employee’s retirement account based on the employee’s qualifying student loan payments. This match is applied to the employee’s 401(k), 403(b), 457, or SIMPLE IRA, just as it would be if the employee made a regular retirement contribution from their paycheck.
If your employer offers a traditional 401(k) match, they can now apply the same matching formula to your student loan payments. For example, if your employer matches 50% of your 401(k) contributions up to 6% of your salary, they can also match 50% of your qualifying student loan payments up to the same limit.
Importance of matching student loans
The introduction of this program addresses a financial challenge faced by many U.S. workers: the balance between paying down student loans and saving for retirement. The Education Data Initiative found that the U.S. had $1.753 trillion in total student debt as of July 15. Nearly 42.8 million U.S. workers carry student loan debt, with the average federal student loan balance being $37,853. Many employees have found it difficult to contribute to their retirement plans, missing out on employer-matching contributions and the compounded growth of retirement savings over time.
Teresa Greenip, a senior wealth manager at Aspiriant, emphasizes on the impact, stating, “Student loan debt can be a significant drain on household income, shifting resources away from necessities, retirement savings, and other goals such as purchasing a home.”
By allowing employers to match student loan payments, the SECURE 2.0 Act provides a new incentive for employees to focus on debt repayment without sacrificing their long-term financial security.
Who qualifies for a 401(k) student loan match?
- Retirement plans that qualify for a student loan match are 401(k)s, 403(b)s, SIMPLE IRAs, and government 457(b)s.
- The IRS defines qualified student loan payments (QSLPs) as payments made by an employee to a qualifying student loan belonging to the employee, the employee’s spouse, or a dependent. The employee must also be legally obligated to make student loan payments.
- Student loan cosigners aren’t the primary borrowers. Therefore, they are not eligible for a 401(k) student loan match.
- All employees who qualify to receive regular employer-sponsored matches are eligible for student loan matches. The frequency of matching contributions can differ from regular employer-match contributions but must be at least once per year.
How does the 401(k) student loan match work?
Under the 401(k) student loan match program, when you make a qualifying payment toward your student loan, your employer can match that payment by contributing an equivalent amount to your retirement plan, up to a specified percentage of your salary. This contribution follows the same rules regarding eligibility, vesting, and contribution limits as regular 401(k) matches.
For instance, if your employer offers a dollar-for-dollar match on your 401(k) contributions up to 5% of your salary, they would apply the same match to your student loan payments. If you make a $200 payment toward your student loan and that payment qualifies, your employer would contribute $200 to your retirement account, assuming it falls within the match percentage and contribution limits.
Benefits of the 401(k) student loan match
Relieving financial strain
One of the advantages of this program is that it alleviates the financial stress many employees face when trying to balance student loan repayments with saving for retirement. In the past, workers often had to choose between paying off debt and contributing to their 401(k), potentially missing out on employer-matching contributions and the tax advantages of retirement savings.
With the 401(k) student loan match, employees no longer have to make this difficult choice. They can pay down their student loans while still growing their retirement savings, ensuring they don’t miss out on years of tax-deferred or tax-free growth.
Attracting and retaining talent
For employers, offering a 401(k) student loan match can be a powerful tool in attracting and retaining top talent. Retirement benefits are highly valued by employees, and the added benefit of a student loan match could make a company more competitive in the job market. Additionally, this program may encourage employees to stay with their employer longer, as they work toward full vesting of their retirement contributions.
