By Zack Hochberg
Many Americans feel they need to choose between either paying off their student loans or saving for retirement. However, under SECURE 2.0, the act included in the United States government’s new spending bill, that will no longer be the case. The bill features new ways for employees to pay their student loan debt.
As of 2021, about 45 million Americans are affected by the student loan crisis and owe a total of $1.75 trillion in student loan debt, according to the Federal Reserve. It’s not just millennials who are affected – the age 35-49 group owes the most, with $622 billion in federal loans.
Additionally, baby boomers also carry a significant amount of debt. Data from the Department of Education shows that in 2021, nearly nine million workers age 50 and over still had student debt, either from loans they took out for themselves or loans they took out for their children’s education.
The SECURE 2.0 Act allows employers to contribute to their defined contribution plans, such as 401(k) plans, to match their employees’ student loan repayments.
Previously, employer contributions could only match Roth and pre-tax elective deferrals or after-tax contributions. The new law includes provisions to minimize the administrative burden and risk to employers by allowing them to rely on employees’ annual certification of the amount of their qualifying student loan payments.
It also addresses how employer contributions for student loan payments will be treated for nondiscrimination purposes and allows for the creation of a separate group for ADP testing purposes for employees who receive such contributions.
ADP testing refers to the process of evaluating the compatibility of a 401(k) plan’s recordkeeping system with the regulations set by the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA). ADP (Actual Deferral Percentage) testing is used to ensure that the contributions made by highly compensated employees (HCEs) do not exceed a certain limit compared to those of non-highly compensated employees (NHCEs).
“The idea is that employees who are overwhelmed with student debt may not realistically be able to save for retirement, and thus are missing out on available matching contributions. This legislation would allow them to receive those matching contributions by reason of repaying their loan,” the authors of the bill said.
These changes will take effect for plan years starting January 1, 2024 and later.
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In addition, the bill also includes the ability for 529 plans, an account dedicated to helping students pay for school, to be rolled over into a Roth IRA for the beneficiary.
According to Fidelity, 529 plan assets can be transferred to a Roth IRA for the beneficiary after 15 years, as long as it doesn’t exceed annual and lifetime contribution limits. The transfer must happen within 5 years of the distribution and it is considered as a contribution to the annual Roth IRA limit.
While SECURE 2.0 provides increased opportunities to save for retirement, everyone’s financial situation is different. As always, consult your financial adviser or tax professional to understand how SECURE 2.0 changes apply to you.
About the author: Zack Hochberg
Zack is a journalism student at Quinnipiac University. In addition to writing for Retirement Daily, he also covers Quinnipiac Athletics and the Boston Celtics as well as owning a marketing company, Hochberg Marketing.
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