One of the many provisions tucked into 2022’s massive SECURE 2.0 legislation is the option for employers to assist employees with student loan payments, by treating the payments as a contribution to the retirement plan, and thus making them eligible for employer matches. Of course the protocols for implementing the student loan matching feature to a 401k plan must be carefully followed. For example, an employer cannot use plan assets to cover the fees for a plan amendment adding the student loan matching feature. Read on for specific pointers from experts at the Retirement Learning Center.
Expenses Related To Retirement Plan Amendments
Periodically reviewing and adjusting retirement plan design features helps plan sponsors keep current and competitive, and provide up to date benefits that are meaningful to employees. However, while exploring potential enhancements to the retirement plan, it’s essential to understand the related expenses, and how to properly handle them. At the Retirement Learning Center, Jenny Kiffmeyer, JD reminds us: “When considering how to pay for expenses related to plan amendments, it is important to distinguish between required vs. discretionary amendments. The costs of discretionary or optional amendments are settlor fees, for which plan sponsors must pay.” Because the option to amend retirement plans by adding a student loan match is a voluntary provision of SECURE 2.0, plan assets cannot be used to cover expenses, as Kiffmeyer further explains:
While adding a student loan matching feature is beneficial to plan participants, it is optional and, therefore, considered a settlor function because it is not required to keep the plan in compliance with applicable laws….The Department of Labor (DOL) has opined that plan sponsors cannot use plan assets to pay for discretionary or optional plan amendments (as opposed to required plan amendments). The plan sponsor must cover the expenses in this case.
When a plan amendment is optional, the DOL considers it a “settlor” function (see the DOL’s advisory opinion: Guidance on Settlor v. Plan Expenses). Settlor functions are activities related to the formation, design, or termination of a plan. Fees for settlor functions cannot be paid for from plan assets; the plan sponsor must pay them. In contrast, plan amendments that are required to keep the plan in compliance with new laws are not considered settlor functions. Such amendments can be paid for out of plan assets.
Helpful To Know: Student Loans and The 401k?
The SECURE 2.0 Act was signed into law in 2022, with the goal of improving the financial security of American workers. Building on the original legislation of 2019, the Setting Every Community Up for Retirement Enhancement Act, (aka SECURE) contains a variety of provisions, some of which were mandatory and others discretionary. One such provision, as Benefits Pro explains, relates to student loan repayments:
The new law permits employers to treat employees’ qualified student loan payments (“QSLP”) as though they were contributions to the employer 401(k) plan and, therefore, eligible for employer matching contributions into the 401(k). The loan repayments themselves are not retirement plan contributions so are not directly subject to the normal 401(k) requirements, but the employer contributions are subject to the 401(k) rules….Employers….have to adopt a 401(k) plan with all of the attendant 401(k) rules. Or, assuming that the employer…has a 401(k) plan in place, adopt amendments to the 401(k) plan that incorporate the student loan repayment match.
An Ounce of Prevention
Despite diligence, mistakes happen, and as a retirement plan sponsor, you are a fiduciary, and can be held personally responsible for:
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