IRS Provides Guidance on Matching Contributions for Student Loan Payments

(Parker Tax Publishing September 2024)

The IRS provided interim guidance with respect to Section 110 of the SECURE 2.0 Act of 2022 (Pub. L. 117-328), which allows employers to make matching contributions on account of employees' qualified student loan payments (QSLPs) under Code Sec. 401(k) plans, Code Sec. 403(b) plans, SIMPLE IRAs, and governmental Code Sec. 457(b) plans. The guidance includes an overview of QSLP matches, addresses employee certification of QSLPs, and provides reasonable procedures a plan may establish to implement a QSLP match feature. Notice 2024-63.

Background

Code Sec. 401(m) sets forth nondiscrimination requirements with respect to matching contributions to a defined contribution plan. Under Code Sec. 401(m)(1), a defined contribution plan is treated as meeting the requirements of Code Sec. 401(a)(4) with respect to the amount of any matching contribution or employee contribution for a plan year only if the plan passes the actual contribution percentage requirement of Code Sec. 401(m)(2) (the ACP test).

Section 110(a) of the SECURE 2.0 Act of 2022 (Pub. L. 117-328) added Code Sec. 401(m)(4)(A)(iii), which amends the definition of matching contributions to include employer contributions made to a defined contribution plan on account of an employee's qualified student loan payments (QSLPs). Under Code Sec. 401(m)(4)(D), a QSLP is defined as a payment that was made by an employee in repayment of a qualified education loan (as defined in Code Sec. 221(d)(1)) incurred by the employee to pay qualified higher education expenses, subject to the the amount limitation in Code Sec. 401(m)(4)(D)(i) and the certification requirement in Code Sec. 401(m)(4)(D)(ii).

Under 401(m)(13), QSLP matches will be treated as matching contributions if the following requirements are satisfied: (1) a plan provides matching contributions on account of elective deferrals (elective deferral matches) at the same rate it provides QSLP matches; (2) the plan provides QSLP matches only on behalf of employees otherwise eligible to receive elective deferral matches; (3) under the plan, all employees who are eligible to receive elective deferral matches are eligible to receive QSLP matches; and (4) the plan provides that QSLP matches vest in the same manner as elective deferral matches.

Code Sec. 408(p)(2)(F) provides that an arrangement under a SIMPLE IRA plan will not fail to be a qualified salary reduction agreement solely because QSLPs are treated as elective employer contributions under the plan. Code Sec. 408(p)(2)(F) includes rules for SIMPLE IRAs that include a QSLP match feature that are generally analogous to the QSLP match rules in Code Sec. 401(m)(4)(D) and 401(m)(13).

Code Sec. 403(b)(12)(A) provides that whether a Code Sec. 403(b) plan offers a QSLP match is not taken into account for purposes of determining whether the plan satisfies the universal availability requirement of Code Sec. 403(b)(12)(A)(ii).

Section 110(g) of the SECURE 2.0 Act of 2022 provides for the Treasury Secretary to issue regulations for purposes of implementing Section 110, including regulations: (1) permitting a plan to make QSLP matches at a different frequency than matching contributions are otherwise made under the plan, provided that the frequency is not less than annually; (2) permitting employers to establish reasonable procedures to claim QSLP matches under the plan, including an annual deadline (not earlier than three months after the close of each plan year) by which a claim must be made; and (3) promulgating model amendments which plans may adopt to implement QSLP matches for purposes of Code Secs. 401(m), 408(p), 403(b), and 457(b).

Notice 2024-63

On August 19, the IRS issued guidance in Notice 2024-63 in question-and-answer format with regard to QSLP matches. The notice provides an overview of QSLP matches, addresses employee certification of QSLPs, and provides reasonable procedures a plan may establish to implement a QSLP match feature. The notice also addresses QSLP ADP testing and miscellaneous issues regarding QSLPs. The IRS anticipates issuing proposed regulations on QSLPs and invited comments on Notice 2024-63 and other aspect of QSLP matches.

Overview of QSLPs

In Notice 2024-63, the IRS defines the term "qualified student loan payment" as a payment:

(1) made by an employee during a plan year in repayment of a qualified education loan incurred by the employee to pay for qualified higher education expenses of the employee, the employee's spouse, or the employee's dependent,

(2) that does not exceed, when aggregated with other such payments for the year, the Code Sec. 401(m)(4)(D)(i) amount limitation for the plan year, and

(3) that is certified for the plan year by the employee in a manner that satisfies the Code Sec. 401(m)(4)(D)(ii) certification requirement.

For a qualified education loan to be treated as incurred by an employee, the employee who makes a payment on the qualified education loan must have a legal obligation to make the payment under the terms of the loan. In general, a cosigner has a legal obligation to make payments under the terms of a loan, but, unless the primary borrower defaults under a loan, a guarantor does not have a legal obligation to make payments under the loan. For example, if an eligible employee is a cosigner on a qualified education loan for the employee's dependent, both the eligible employee and the dependent may have a legal obligation to make payments under the terms of the loan. However, only the individual who makes payments under the qualified education loan can receive a QSLP match on account of those payments.

A plan with a QSLP match feature may not include provisions that exclude employees from receiving QSLP matches if those employees are eligible to receive elective deferral matches. Further, a plan with a QSLP match feature may not exclude employees from receiving elective deferral matches if those employees are eligible to receive QSLP matches.

Employee Certification of QSLPs

A qualified education loan payment is a QSLP only if the Code Sec. 401(m)(4)(D)(ii) certification requirement is satisfied with respect to that payment. The IRS states that a plan may require a separate certification for each qualified education loan payment intended to qualify as a QSLP or permit an annual certification that applies for all qualified education loan payments intended to qualify as QSLPs for a year.

Under the guidance provided in Notice 2024-63, the following items of information must be received by a plan (including a third-party service provider acting on behalf of the plan) in order to satisfy the certification requirement: (1) the amount of the loan payment; (2) the date of the loan payment; (3) that the payment was made by the employee; (4) that the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee's spouse, or the employee's dependent; and (5) that the loan was incurred by the employee.

The certification requirement for any required item of information may be satisfied through affirmative certification by the employee. Alternatively, the certification requirement with respect to the amount of the loan payment in item (1), the date of the loan payment in item (2), and the confirmation of the employee as payor in item (3) may be treated as satisfied through independent verification by the employer or through passive certification by the employee. Independent verification means a method of certification by which a plan is able to validate the accuracy of items (1), (2), and (3). For example, the independent verification requirement with respect to items (1), (2), and (3), including the requirement that the loan payment be made by the employee, is satisfied if an employer allows an employee to make QSLPs through payroll deduction.

Passive certification means a method of certification by which (i) an employee provides written information about a qualified education loan to a plan regarding items (4) and (5), (ii) information about items (1) and (2) is provided from the lender to the plan, including through an employer, (iii) the plan notifies the employee of the information (including, if the plan uses passive certification with respect to item (3), a statement that the employer assumes that item (3) has been satisfied), and (iv) the employee is given a reasonable period to correct the information included in the employee notice. The employer does not have an obligation to inquire whether item (3) has been satisfied, so that the employer may assume item (3) has been satisfied unless the employer has actual knowledge to the contrary. The employee is treated as certifying the information provided in the employee notice if the employee does not correct the information within the reasonable period.

Information about items (1), (2), and (3) must be received annually by a plan. Information about item (4) and item (5) does not need to be received annually by a plan if the employee registers the loan with the plan. However, if a qualified education loan is refinanced or the information contained in items (4) and (5) otherwise changes, updated information must be received by the plan about items (4) and (5), for example, through re-registration of the loan, in order for the Code Sec. 401(m)(4)(D)(ii) certification requirement to be satisfied.

QSLP Match Reasonable Procedures

A plan may establish any reasonable administrative procedures to implement a QSLP match feature. Whether procedures are reasonable is based on all relevant facts and circumstances, including whether QSLP matches are effectively available to all eligible employees and whether the procedures promote compliance with QSLP match requirements. Reasonable procedures include, but are not limited to, the procedures described in Notice 2024-63.

A plan may establish a single QSLP match claim deadline for a plan year or multiple deadlines (including, but not limited to, quarterly deadlines) for QSLP match claim submissions, provided that each QSLP match claim deadline is reasonable. Whether a plan's QSLP match claim deadline is reasonable is based on all relevant facts and circumstances. In determining whether a deadline is reasonable, relevant facts and circumstances include whether employees have a reasonable opportunity to collect and furnish claim submission documentation. An annual deadline that is three months after the end of a plan year is an example of a reasonable deadline.s

Applicability Date

Notice 2024-63 applies for plan years beginning after December 31, 2024. For plan years beginning before January 1, 2025, a plan sponsor may rely on a good faith, reasonable interpretation of Section 110 of the SECURE 2.0 Act of 2022. The guidance in Notice 2024-63 is an example of a good faith, reasonable interpretation of Section 110 of the SECURE 2.0 Act of 2022.

For a discussion of matching contributions for qualified student loan payments, see Parker Tax ¶130,511.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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