BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

What The Secure Act 2.0 Would Mean For Student Loans

Following
This article is more than 3 years old.

Plenty of recovery-driven legislation has been considered by Congress throughout 2020, although most has failed to pass. We all know that the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), which includes direct cash payments to Americans and financial relief to state and local municipalities, has been stuck in limbo since late summer. Further, the House and Senate have yet to settle on a second stimulus package, although one has been up in the air for months, and even though key measures from the first stimulus package (like extended unemployment benefits) have already expired. 

But one piece of legislation — the Securing a Strong Retirement Act of 2020 (Secure Act 2.0) — has a chance to gain bipartisan support. The Secure Act 2.0 includes an array of changes meant to help bolster and protect the retirement prospects of Americans. Some of the key provisions include automatic enrollment in workplace retirement accounts, expanding retirement account options for nonprofit employees, an increase in the age for Required Minimum Distributions (RMDs) to age 75, and higher catch-up contribution allowances for retirement savers ages 60 and over.

Interestingly, the Secure Act 2.0 would also provide a boost for the existing Saver’s Credit for contributions to a retirement plan or an IRA. Specifically, the bill would create a single credit rate of 50% and boost the maximum from $1,000 to $1,500 per person. The maximum income eligibility amount would also be increased so more people could qualify. 

But another key inclusion in the Secure Act 2.0 also pulls student loan debt into the fray. Section 110 of the act calls for the “treatment of student loan payments as elective deferrals for purposes of matching contributions.”

If this bill were to become law, an employer could make matching contributions under a 401(k) plan, 403(b) plan, or a SIMPLE IRA while the employee makes student loan payments. The language from the Secure Act 2.0 explains very clearly why student loan payments help protect retirement.

“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,” the authors of the bill write. “This legislation would allow them to receive those matching contributions by reason of repaying their loan.”

Benefits Of Employer Student Loan Payments

For employees who don’t have student loan debt, this particular provision of the Secure Act 2.0 won’t change anything. But for those who are drowning in student loan bills that could take decades to pay off, this change could make a significant difference in their financial future. 

According to Jim Anderson, the Director of Financial Aid at Montclair State University, people just starting out in their careers are sometimes faced with the financial challenges of paying off student loan debt, and, as a result, cannot afford to make the minimum contributions necessary to receive the employer match in company-sponsored 401(k) plans. 

“This provision would enable more people to both pay off their student loan debt and start saving for retirement,” he says. 

Bobby Glotfelty, Senior Licensed Financial Professional at Betterment for Business, also points out that this move could be a solid option for employers who want to show they care about their worker’s well-being.  

Gifting or rewarding student loan payments is a concept a number of forward-thinking companies have already introduced as a benefit, he says, adding that he hopes this legislation would encourage more employers to follow suit. 

“With many Americans facing financial difficulties right now and student debt continuing to rise, I think benefits like these will become a much larger priority for young employees, and will be key in helping companies attract and retain talent.”

Indebted Workers Getting Preferential Treatment?

We all know that student loan forgiveness has become highly political, and even President Biden has suggested a willingness to forgive some student debt as part of the next stimulus package. It’s starting to seem like politicians see student loan borrowers as a huge voting block they could potentially gain access to, which makes sense since more than 44 million adults owe money on student loans.

Steve Muszynski, the founder and CEO of Splash Financial, says that this is one downside of any benefit relating to student loan debt. Whenever a new incentive is provided, some can see it as “favoring a select group of people over others,” he says. 

However, the student loan provision in the Secure Act 2.0 doesn’t actually give indebted workers anything others cannot gain access to. Workers who don’t have student loan debt can continue receiving matching funds for their retirement accounts if their employer offers them. 

With that in mind, Muszynski says that others will view this benefit as a way to further help an ever-evolving workforce, drive increased employee loyalty, and enhance societal good. 

“Allowing employers to provide these payments without negative tax consequences is worthwhile,” he says. “After that, the decision is up to individual companies.”

The Bottom Line

The Secure Act 2.0 seems to have bipartisan support, yet it remains to be seen if it will get the push it needs or lose steam in the final weeks of Trump’s term as President. Either way, a temporary provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows employers to make tax-free student loan payments of up to $5,250 toward their worker’s loans through December 31, 2020. The money paid toward student loans is not counted as taxable income for the worker through the end of this deadline, and it allows for a tax advantage on the employer side as well. 

Before the CARES Act passed, employers could already make payments toward qualified education expenses such as tuition and textbooks, per The IRS. The CARES Act just expanded this provision to include student loan debt.

At the end of the day, it appears student loan relief is a benefit at least some employees want to receive. According to Anderson, companies would be wise to listen to what their workers want.

"There are employers who already assist employees in paying off student loan debt, oftentimes as part of a signing bonus, such as for recruits from top MBA programs,” he says. “More employers should consider establishing such programs, both to assist in the recruitment of new talent and as a means to retain employees."

Follow me on Twitter or LinkedInCheck out my website