401(k) Law’s Appeal Fades as Workers Face Student Debt Deadlines

Fast-approaching fall deadlines ending pandemic-era student debt forgiveness programs have increased pressure on employers to help workers with impending payments, but eroded the early allure of a 401(k) loan matching program set to take effect next year.

A provision in the SECURE 2.0 Act (Pub. L. No. 117-328) will allow employers to treat student loan repayments like retirement plan deferrals when calculating matching contributions, helping boost employee 401(k)s.

But workers are demanding even more direct help than the landmark 2022 retirement law can provide in paying off their educational debt as the federal government winds down Covid-19-related loan forbearance. Real confusion still left for regulators to resolve in the SECURE 2.0 student debt provision is also prompting employers to look elsewhere for solutions.

Congress tied student loans to retirement savings to address a growing concern that debt-burdened young workers put their futures at risk by focusing too much on student loan bills rather than building nest eggs early in their careers.

“Today, millennials are the largest segment of the workforce, and they’re the largest segment of federal loan borrowers,” said Tom Kelly, a principal and voluntary benefits leader at Buck Global LLC. “It makes sense to help them get a savings head start.”

Direct Help

But the immediacy of mandatory payments resuming this fall is driving employer interest toward more direct means of helping workers out financially.

After three years and nine different Covid-related extensions, nearly 46 million borrowers will face interest accruals in September and regular monthly bills beginning in October.

The US Supreme Court in June struck down a Biden administration plan to forgive up to $20,000 per borrower, further limiting workers’ options.

Those already feeling inflationary financial strain are pressuring their employers for help paying back the money they borrowed. More than half of workers ages 25–40 want some sort of student loan support at work, according to the Buck 2022 Wellbeing and Voluntary Benefits Survey.

Only about 8% of employers offer direct repayment assistance, according to the Society for Human Resource Management, but that number has doubled since 2020 under a CARES Act (Pub. L. No. 116-136) provision that allows companies to pay up to $5,250 toward a loan tax free for the employee and employer. The provision remains in effect only until 2026 unless Congress extends it.

For those companies that have the resources to help their workers pay off loans directly, the CARES Act measure is emerging as a more attractive contender than SECURE 2.0, said Adam Cohen, a partner at Eversheds Sutherland LLP in Washington.

“Student loans are a problem for many workers now,” Cohen said. “Workers are most interested in salaries and bonuses, not retirement savings.”

In lieu of directly helping workers pay off their debts, financial wellness programs and coaching services are becoming viable alternatives for employers seeking to demonstrate their willingness to pitch in.

“These coaches bring an unmatched level of expertise to work with employees on their unique financial situations to determine the most strategic and effective way to tackle their student loan debt,” said Kelly.

Direct student-loan payoffs or coaching are also methods for talent recruitment and retention, especially in a tight labor market. For younger workers with large loans to pay down, deferring cash into 401(k)s may not have the same appeal as these other perks.

SECURE Confusion

Despite being widely known as the “student loan provision” of SECURE 2.0, the benefit tying 401(k) and student loan repayments may not deliver what employers believe Congress was initially selling, according to Cohen.

“So much attention has been paid around the high burden of student loan debt,” he said, but there’s been “misunderstanding” about how the provision tackles the issue.

The focus on student loans in the passage of SECURE 2.0 led to confusion among some employers that the provision was less about retirement savings than it was tax-free repayment, said Fred Reish, a partner at Faegre Drinker Biddle & Reath LLP. It’s been up to third-party plan service providers such as recordkeepers to help explain to employers that the provision is strictly applicable to 401(k) and 403(b) plan contributions, Reish said.

Many employers mistakenly believed their matching contributions could be used to help directly pay off their workers’ loans, doubling an employee’s spending power as they try to pay down the principal, Cohen said.

Meanwhile, companies that do seek to bolster younger retirement savers still know very little about what the SECURE 2.0 Act student loan matching program will look like if they choose to adopt it for next year.

There are lots of outstanding questions employers are grappling with about their fiduciary duty to determine whether loan repayments have actually been made and how loan-based matches would stack up against other workers’ account balances when conducting retirement plan non-discrimination testing.

The law also wasn’t entirely clear whether the matching program affects just qualified federal student loans or private, repackaged, or refinanced loan products. It’s also not clear whether student debt applies to the student or the borrower, who can sometimes be a friend or relative.

The IRS has said it’s working on guidance to clarify the SECURE 2.0 provisions, but there’s still no solid timeline on when it will be issued.

“If you’re a corporate leader who is awesome enough to read up on SECURE 2.0 and student loan repayment options, what is scary right now is how much you don’t know,” said Sophie Raseman, head of financial solutions at Brightside Benefit Inc., a financial wellness benefit provider.