SECURE Act 2.0...the rest is commentary
Part 1. Questions about matching contributions on student loan payments
Section 110 of the SECURE 2.0 Act of 2022 (SECURE 2.0) wrote into law a new design concept – matching contributions to a 401(k) plan based on a participant’s student loan payments, that is, treating student loan payments as if they were elective deferrals.
There is sure to be IRS guidance on Section 110; however, in the interim the McDonald Hopkins Tax and Benefits team has prepared insight on the practicalities of this feature of SECURE 2.0.
QUESTION 1: Could a participant get matching contributions on elective deferrals and on student loan payments at the same time?
We believe the answer is “Yes.” Section 110 imposes a limit on the amount of “qualified student loan payments” (QSLP) that can be matched each year equal to the difference between the annual limit on elective deferrals and the actual elective deferrals the participant makes for the given year. This indicates that the law contemplates a participant making elective deferrals and QSLPs during the same plan year and having both matched. Given this, we see no reason why both types of matching contributions cannot be made at the same time.
QUESTION 2: Could the match based on QSLPs be different from the match on elective deferrals. For example, match 100% of elective deferrals and 50% of QSLPs?
Not if the employer wants the QSLP-based contribution to be treated as a matching contribution. For a QSLP-based contribution to be treated as a matching contribution (a “QSLP match”), elective deferral matches must be “at the same rate as” QSLP matches (eligibility and vesting must also be the same). Otherwise, we think the QSLP- based contributions would be discretionary employer contributions subject to general nondiscrimination testing and potentially different distribution requirements (increasing administrative complexity and the chances for error).
QUESTION 3: Can QSLP matches be funded on a different cycle from matches on deferrals, for example on a quarterly rather than payroll period basis?
Unclear - but we believe the answer is “Yes.” As a general matter, if a 401(k) plan is not a safe harbor plan the employer has a great deal of flexibility to decide when to fund matching contributions. Although commonly calculated and funded each payroll period, matching contributions can be funded until the employer’s tax return due date for the year to which the contributions relate.
And, with respect to QSLPs, there are no elective deferrals that need to be segregated and remitted quickly to avoid prohibited transactions. It is possible that “rate” (See the answer to question 2) refers not only to the contribution formula but also to the frequency at which the calculations are performed and the contribution accrued. Even if this is how the statute is supposed to be understood, the QSLP match cannot be calculated unless and until the participant submits the required documentation; we expect (and hope) future guidance will specify when a QSLP is treated as “made” for purposes of calculating QSLP matches. If the plan does not use a safe harbor matching contribution, we believe the employer would retain the flexibility to decide when to actually deposit the QSLP matches until the legal deadline.
QUESTION 4: Does an employer need to amend their plan before starting to make QSLP matches?
No, the deadline for amendments is not until December 31, 2025. In the interim, a plan must be operated in compliance with the law and the eventual amendment must accurately reflect actual operations (and be adopted by the deadline). To ensure consistent compliant operations and to create documentation demonstrating operational compliance, we advise adopting clear and thorough written participant communications and administrative procedures in collaboration with your recordkeeper and administrator.
McDonald Hopkins will be providing additional commentary on SECURE 2.0 as we work through questions with clients and as the IRS and DOL issue guidance.