IRS Issues Update on 401s and Student Loan Payments

The Internal Revenue Service (IRS) has issued new guidance for employers and employees regarding matching contributions to retirement plans based on employees’ student loan payments.

The government agency issued new guidelines that allows employers with 401(k), 403(b), 457(b) plans and SIMPLE IRAs to make matching contributions to an employee’s retirement fund based on their student loan repayments. It implements section 110 of the SECURE 2.0 Act, which was signed into law by President Joe Biden in December 2022.

Many individuals who are repaying student loans may not have the financial ability to save for retirement as well, which means they not only miss out on potential retirement savings, but also lose the opportunity for employer matching contributions.

The notice outlines that, to qualify for employer contributions, the loan holder must certify that they have made a qualified student loan payment by the following:

• the amount of the loan payment made;
• the date the payment was made;
• confirmation that the employee made the payment;
• confirmation that the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, their spouse or a dependent.
• confirmation that the employee incurred the loan.

The notice applies for plan years beginning after December 31, 2024. The IRS said it plans to issue proposed regulations that will provide further guidance.

Research has found that student loan debt can impact a person’s ability to save for old age. A three-year study conducted by the Employee Benefit Research Institute (EBRI) and JP Morgan Asset Management has found that having student loan debts has a “statistically significant negative impact” on how much workers are able to contribute to their retirement.

Those who made less than $55,000 and are repaying student debt contributed 5.3 percent to their savings, while those not holding any education loans were able to save 5.7 percent over the three-year study. Those with student loans and incomes over $55,000 contributed an average of 6.1 percent, while debt-free participants contributed 7.3 percent.

Recent research by JP Morgan found that, when student loan repayments were temporarily halted during the coronavirus pandemic, the median increase in the average contribution rate to retirement funds was 2.5 percent.

When debtors were required to restart payments in 2023, JP Morgan found that roughly one-quarter of the population decreased their 401(k) contributions, with a median decrease in the average contribution rate being 2.7 percent.

Has your ability to save for your retirement been affected by student loans? If you would like to share your story, email a.******@******ek.com.