Secure Act 2.0 Transforms Debt into Retirement Wealth: Pros and Cons

In 2022, Congress passed an expansion of the 2019 Setting Every Community Up for Retirement Act, known as The Secure Act 2.0. It aimed to bolster retirement readiness among Americans. Section 110 of the legislation includes a novel provision that addresses the specific challenges student loan borrowers face — namely, that student debt impedes their ability to adequately save for retirement. 

Starting in 2024, it empowers employers to allocate contributions to retirement plans on behalf of employees in proportion to their “qualified student loan payments.” This employee benefit initiative helps borrowers  cultivate a retirement nest egg as they simultaneously navigate complexities of student loan repayment.

How a Secure Act 2.0 student loans provision boosts employee retirement savings

The definition of “qualified student loan payments” is broad and inclusive. It describes any qualified education loan debt accrued by individuals to finance their higher education expenses. This extends to both private and federal student loans, recognizing the diverse financial pathways that individuals pursue toward their college education.

It includes a comprehensive framework for eligible retirement accounts that are poised to receive matching contributions, based on an employee’s student loan payments. 

Traditionally, to qualify for an employer-sponsored retirement account match, employees must generally allocate a percentage of their salary to the plan, a practice commonly referred to as a salary deferral. 

However, the new provision offers a novel approach to bridging the gap between student loan repayment and retirement savings. By recognizing “qualified student loan payments” as elective deferrals eligible for employer matching, the law effectively extends retirement savings benefits to borrowers who’d otherwise struggle to participate in their employer's matching program.

Secure Act 2.0 provision eligibility

Traditional retirement vehicles such as 401(k) plans, 403(b) plans and SIMPLE IRAs are prime recipients of these contributions. Government-sponsored retirement accounts, like 457 plans, are also included in this provision, expanding the scope of accessibility for public-sector employees.

It's essential to note that there are intricate eligibility criteria that employees must meet to receive an employer match, based on qualified student loan repayments. A cap is imposed on the amount of student loan payments that borrowers can leverage for employer matches. This cap is tethered to the maximum salary deferral limit applicable in a given year, minus any existing elective deferrals. 

To illustrate, let's consider a scenario where the maximum salary deferral limit for a 401(k) plan in 2024 is $23,000 for individuals under the age of 50. 

In this scenario, if a borrower defers $15,000 of their salary to a retirement plan and simultaneously makes $10,000 in qualified student loan payments throughout the year, the total qualifying amount for the employer match would be capped at $8,000. To receive this benefit, borrowers must annually certify their student loan payments.

Related: The Truth About Retirement Contributions: Debunking Common Misconceptions

The other side of the coin: Where The Secure Act 2.0 falls short

This student loan matching provision offers a promising avenue for employees to build retirement savings while repaying student debt. However, there are some shortcomings to be aware of.

It’s not required by law

Employers aren’t legally mandated to offer any form of retirement matching plan, let alone one connected to student loan repayments. This benefit is discretionary and contingent upon the policies and priorities of each employer. Proactively inquire with your employer to see if it offers a matching plan, and how to best capitalize on it.

It doesn’t lower your adjusted gross income

Another significant consideration is that your student loan payment in itself doesn’t directly count as a contribution to your retirement plan. This distinction is crucial, particularly if you’re enrolled in an income-driven repayment (IDR) plan, and strategically keep your income low to qualify for lower payments upon recertification. 

Unlike pre-tax salary deferrals, which can effectively reduce your adjusted gross income (AGI) — consequently lowering your tax liability — student loan payments don’t afford the same AGI-reducing benefit. 

Therefore, if you rely on IDR, you might find that you don’t inherently see an AGI reduction by participating in this employer-matching program. Instead, you might need to explore alternative financial planning strategies to achieve your desired AGI outcome while still benefiting from your IDR plan and retirement savings goals.

It might restrict the frequency of employers contributions

The frequency at which employer-matching contributions are made under this provision might differ from a regular match based on salary deferrals. Typically, the latter occurs per pay period. 

The Secure 2.0 legislation imposes specific requirements that might restrict an employer's flexibility in making matching contributions, often limiting it to an annual occurrence. Consequently, participants in this program should be mindful that the benefits of the match might not materialize immediately.

It’s murky about student-led payments toward Parent PLUS Loan 

There’s ambiguity regarding whether individuals who are making Parent PLUS Loan payments on behalf of their parents, are eligible for the provision. This lack of clarity introduces an additional layer of complexity for borrowers. Borrowers navigating this scenario should seek clarification from their human resources department, or plan sponsor, to confirm the eligibility of these student loan payments.

Is it right for you? Evaluating your unique financial landscape

Ultimately, your employer must have an existing retirement savings matching program and decide whether it will offer the student loan payment match. If it does, you must meet its eligibility criteria to participate in the matching program and have qualifying student loan payments. 

Remember that employer matches based on student loan payments are subject to the same vesting schedule as matches based on salary deferrals. This vesting schedule is the timeline in which employees attain full ownership of their employer-matched contributions. 

Although some employers let you have immediate ownership of the matched contributions, others might impose a vesting schedule that gives you gradual ownership rights over a predetermined period. Consequently, it could potentially take years before you can claim full ownership of your employer contributions.

When evaluating whether to take advantage of your employer's student loan-matching retirement benefit, it's prudent to inquire about any vesting requirements associated with the retirement plan.

If a vesting requirement exists and there’s uncertainty regarding your tenure with the employer, carefully consider whether the potential benefits of the student loan match align with your future plans. If you anticipate leaving your current employer before becoming fully vested, it’s worth reconsidering whether taking advantage of an employer match makes sense.

Don’t abandon your long-term loan forgiveness strategy

Assess your current student loan repayment strategy and consider how a prospective retirement savings matching program aligns with your plan. For instance, individuals with federal student loans who are pursuing loan forgiveness (especially Public Service Loan Forgiveness) under an IDR plan might need to carefully weigh their options. 

In such cases, it might not be financially prudent to allocate additional funds toward accelerating loan repayment beyond the required monthly minimum payment. This could inadvertently diminish your future loan forgiveness benefit, essentially trading off long-term student debt relief for short-term employer matches toward retirement. 

Alternatively, borrowers who are in this scenario might maintain their minimum monthly IDR payment and redirect any surplus funds toward increasing their salary deferral into a retirement plan. By pursuing this strategy, you can effectively replicate the benefits of employer matches while simultaneously reducing your AGI through pre-tax contributions.

Private student loan borrowers

Private student loan borrowers should also evaluate the impact of a student loan matching program and how it aligns with their repayment strategy. In this context, carefully consider the prevailing interest rates on your private loans. 

If the interest rates on your loans are notably low, pursuing an aggressive payoff strategy solely to capitalize on the employer match might not be the most advantageous course of action. 

Instead, you might find greater financial benefit in allocating the same funds toward increasing your pre-tax salary deferral into the retirement plan, thereby leveraging the associated tax benefits. You’d also capitalize on a sage old arbitrage strategy — borrowing at low rates while allocating money toward assets with potentially higher return rates.

The winning scenario: When The Secure Act 2.0 works in your favor

If you don't qualify for IDR and are grappling with high student loan interest rates, then adopting an aggressive loan repayment approach while capitalizing on this special employer match could prove beneficial. 

However, it's essential to recognize the financial implications in this strategy. Allocating after-tax funds toward aggressive student loan repayment and receiving employer matches into a pre-tax retirement account might inadvertently subject you to double taxation at retirement age. 

This arises from the fact that the retirement account contributions, including the employer matches, will be taxed upon withdrawal during retirement. To mitigate the potential double taxation, consider asking your employer to make their matching contributions Roth or on an after-tax basis. Roth distributions in retirement are tax-free, so this strategic maneuver not only optimizes the employer-match benefit but also ensures tax-efficient utilization of retirement savings.

The passage of The Secure Act 2.0 in 2022 marks a significant step toward aiding employees in retirement preparation, particularly those burdened by student loan debt. Enabling employer contributions into retirement plans based on employees' qualified student loan payments can help alleviate the strain of saving for retirement on borrowers. 

However, eligibility and the extent of benefits are subject to various factors, including employer discretion, salary deferral limits and vesting schedules. Although this initiative presents a valuable opportunity for some student loan borrowers, individuals are advised to carefully assess their unique financial circumstances and loan repayment strategies to determine whether this new provision is a good fit.