401(k) student loan repayment: How this could work for small businesses

As employers compete to attract qualified applicants, more and more are looking at ways to attract new workers with improved perk packages that beef up existing retirement savings and flexible spending offerings. One such new benefit is the 401(k) student loan matching program added by SECURE 2.0 legislation that went into effect on January 1, 2024.

What is a 401(k) student loan matching program?

A 401(k) student loan matching program enables employees eligible for an employer-sponsored 401(k) who make qualifying payments toward student loans to receive an employer match deposit into their 401(k) plan based upon loan repayments.

The original program was established by Abbott Laboratories, a health company that works on student loan benefits, and approved by the IRS under a private letter ruling. The Freedom 2 Save plan allowed 401(k) plan participants who contribute 2% of eligible pay toward “qualified student loan payments” to receive a 5% nonelective contribution from Abbott as a 401(k) deposit. Regulators took this one step further with SECURE 2.0, which allowed any qualified 401(k), 403(b), governmental 457(b) plan, or SIMPLE IRA to offer a modified version of the provision.

A “qualified student loan payment” is broadly defined as any debt incurred by an individual solely to pay qualified higher education expenses. The maximum allowable matched loan repayment amount is limited to the same amount as maximum deferrals for the year (for 2024, $23,000, or $30,500 if age 50 or older). Employees can self-certify their loan repayments, although each plan may have its own verification process. Additional guidance from the IRS is anticipated as the provision becomes more popular.

Why would an employee be interested in a 401(k) student loan matching program?

There are several powerful reasons that an employee may be interested in a 401(k) student loan matching program.

1. Too much student debt

According to the Federal Reserve, outstanding student debt hit $1.56 trillion at the end of the first quarter of 2024. To put things in perspective, student loan debt arrived at the $1 trillion mark in 2012. Student debt levels are quickly growing at such a rate that one in six graduates holds student debt that exceeds their income. Many recent graduates have to make a choice to pay their student loans or defer into a 401(k) plan.

2. Starting (or beefing up) a nest egg

This benefit may very well be the tipping point for a hesitant worker to set up his or her 401(k). Recent grads with student loan debt may appreciate “extra money” for something they have to pay regularly. Receiving the match for a student loan will allow employees to begin their nest egg early, and once they can afford to defer into the 401(k) plan, they can continue their savings journey.

3. Deferred tax treatment of 401(k) matches

A key incentive of 401(k) student loan matching programs is that the employer match receives tax-deferred treatment by the IRS. Since the funds are held in the plan, the employee is not taxed on the funds until withdrawal. And on top of that, their employees are able to build up a nest egg.

What’s the benefit for the employer?

The main benefit is the ability to attract and retain talent. According to the Education Data Initiative, the average federal student loan debt is $37,088. This could explain why 48% of job seekers would give at least “some consideration” to a lower-paying job with student loan assistance when stacked against a higher-paying one (similarly, 44% of job seekers would consider a lower-paying job with tuition assistance).

Secondly, 401(k) matching contributions are tax deductible. Employers will lower their taxable income simply by making a contribution to plan participants. According to the IRS, employers can deduct up to 25% of compensation earned during the year from eligible employees participating in the plan if they provide that amount as an employer contribution.

How does this compare with other options for paying down student loan debt?

As an employer or employee, you may think, “Wouldn’t it be better just to provide the cash to the employee and let the employee apply the funds to their student loan directly?” Let’s dive deeper.

A 401(k) student loan matching program could help make the most out of every dollar for both employee and employer. Let’s imagine that you’d like to offer your employee a $1,000 cash bonus to pay down student loans. If you give that employee that bonus in cash, they’ll pay income taxes on the money, and you’ll also owe Social Security, Medicare, unemployment, and other taxes. The average single worker in the U.S. faced a net average tax rate of 24.2% in 2023. Ultimately, a $1,000 bonus costs employers an average of $80 while putting only $776 in employees’ pockets.

On the other hand, if you were to offer an additional $1,000 in matched 401(k) contributions, your addition to your employees’ retirement funds could grow tax-free until withdrawal. The employer would be able to write off the contribution, and employees would enjoy preferential tax treatment as their nest egg grows. 

For a deeper dive into the tax benefits of 401(k) employer match: Is a 401(k) match contribution tax deductible?

Is 401(k) matching based on student loan repayment suitable to all companies?

Companies hiring college-educated workers are the best suited to reap the benefits of a 401(k) student loan matching program the fastest. This is due to student loan balances being top of mind for the talent pool of college-educated candidates.

This benefit may also be of high interest to those in professions that require extensive secondary education, such as attorneys and doctors. Many of these graduates enter the workforce with over $100,000 in debt. Providing a matching program for student loan repayments could allow individuals to participate in their 401(k) plans much sooner.

Benefits of outsourcing your 401(k) management

With limited human power and resources, running a 401(k) plan can be daunting to small and medium-sized businesses. That’s why outsourcing your 401(k) management may be a cost-effective way to streamline administrative tasks. While Human Interest has yet to support a student loan matching program, we can help set up a small business retirement plan. 

Eligible companies can qualify for tax credits that cover 100% of plan start-up costs of up to $5,000 per year for the first three years, and an additional $500 tax credit for three consecutive years a plan has an auto-enroll feature. This could mean up to $16,500 in tax credit savings. Plus, Human Interest is the first 401(k) provider to offer an embedded Tax Savings Maximizer to help make it easier to claim your tax credits.