SECURE Act 2.0: Expanding Coverage and Increasing Retirement Savings (Pt. 2)
Summary and L&H’s Perspective
March 2023
This article will continue our discussion of Theme 1: Expanding Coverage and Increasing Retirement Savings, the first of four essential themes of SECURE Act 2.0. As a continuation of February’s newsletter article, SECURE Act 2.0 had two other notable provisions aimed at expanding coverage and increasing retirement savings.
Section 110 — Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions.1
Summary
Section 110 is intended to assist employees who may be unable to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive matching employer contributions by reason of repaying their student loans provided the loans are “qualified student loan payments.”2 Qualified student loan payments are broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses. This provision is set to take effect after December 31st, 2023.3
L&H’s Perspective
Section 110 attempts to partially address an ever-increasing national issue—student loan debt. The Department of Education reports over $1.7(T) in student loan debt.4 Section 110 appears to be a codification of a private letter ruling (PLR 201833012, May 22, 2018).5 Adopting employers are allowed to place employer contributions into a qualified retirement plan after an employee evidences repayment of qualified student loans. This type of provision can help employees participate in their qualified plan while paying down student loan debt. For employers looking to retain and attract new employees, this may be a worthwhile provision to consider once additional guidance has been issued and recordkeeping platforms have been updated.
It may seem intuitive that younger individuals bear the burden of student debt, but this is not always the case. One report from a national third-party credit union indicates that employees age 50+ hold approximately 36% more in average student loan debt than employees under age 50. In saying that, 89% of employees holding student loan debt are 18-49 years old and hold an average balance of $34,500.6
Additionally, the Internal Revenue Code (IRC) Section 127 allows an employee to exclude up to $5,250 from gross income.7 Utilization of this provision for qualified student loan principal and interest repayment is only available prior to January 1st, 2026 (unless extended by Congress).8
Section 125 – Improving Coverage for Long-Term, Part-Time Employees.9
Summary
The SECURE Act (2019) requires employers to allow long-term, part-time employees to contribute to their employers’ 401(k) plans.10 The SECURE Act requires a dual eligibility requirement under which an employee must complete either 1 year of service (with the 1,000-hour rule) or 3 consecutive years of service (where the employee completes at least 500 hours of service each year). Effective for plan years beginning after December 31st, 2024, SECURE Act 2.0 reduces the consecutive year requirement from 3 to 2. This provision extends long-term, part-time coverage rules to 403(b) plans subject to ERISA11 and provides that pre-2021 service is disregarded for vesting purposes.
L&H’s Perspective
Access to a work-sponsored retirement plan has been linked to increased savings and financial security. 82% of workers reported having at least $25,000 in savings and investments when provided with a retirement plan compared to 28% of workers without a retirement plan.12 Additionally, utilization of an employer’s qualified retirement plan generally provides a level of fiduciary oversight regarding the plan’s investments.13 This oversight may lead to better participant outcomes through access to financial advice and education.14
Coming Up…
The next article will focus on Theme 2: Income Preservation and may include additional provisions related to Theme 3: Simplification and Clarification of Retirement Plan Rules—which will look at several new potential ways for distributions.
For more information, contact Matt Arey, JD or Nate Moody, CPFA® at (207) 773-5390 or marey@lebelharriman.com | nmoody@lebelharriman.com.
Sources
- SECURE Act 2.0 Section 110; See also Congressional Summary SECURE Act 2022 Section 110 Summary.
- SECURE Act 2.0 Section 110; See also Congressional Summary SECURE Act 2022 Section 110 Summary.
- SECURE Act 2.0 Section 110; See also Congressional Summary SECURE Act 2022 Section 110 Summary.
- Hanson, Melanie. “Student Loan Debt Statistics” EducationData.org, February 10, 2023, https://educationdata.org/student-loan-debt-statistics.
- PLR 201833012, May 22, 2018; See also IRS Private Ruling on Student Loan Benefit Under 401(k) Plan Likely to Fuel Interest by Groom Law Group; https://www.groom.com/resources/irs-private-ruling-on-student-loan-benefit-under-401k-plan-likely-to-fuel-interest/ August 21st, 2018.
- Student Debt Benefit Program Sample Analysis, Fidelity Investments quoting TransUnion aggregated employer data. (2021)
- 26 U.S.C. 127; IRC Section 127 has numerous other requirements, including that the plan be in writing. If you have any questions, please consult with your appropriate tax adviser to review your specific facts and circumstances. L&H does not practice law or tax. Although licensed to practice law, the author of this article, does not provide legal services to clients. Attorney client privilege does not apply to communications.
- 26 U.S.C. 127(c)(1)(B)
- SECURE Act 2.0 Section 125; See also Congressional Summary SECURE Act 2022 Section 125 Summary.
- Exceptions apply for collectively bargained employees.
- SECURE Act 2.0 Section 125; See also Congressional Summary SECURE Act 2022 Section 125 Summary.
- Retirement Confidence Survey 2021 RCS Fact Sheet #6, Workplace Retirement Savings Plans Impact on Asset and Satisfaction.
- Treasury Regulation 1.404(c) requires broad diversification of qualified plan assets with limited exceptions.
- Retirement Confidence Survey 2021 RCS Fact Sheet #6, Workplace Retirement Savings Plans Impact on Asset and Satisfaction, Factors Considered When Selecting Investment Options.
The information presented here is for educational purpose only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. All examples are hypothetical and are for illustrative purposes only.