Secure Act 2.0: Analysis of Expanded Matching Contribution and Emergency Savings Account Provisions

The SECURE 2.0 Act of 2022 (SECURE 2.0) makes far-ranging changes to the US employer–retirement plan system intended to expand access to retirement plans and encourage savings by US workers. This LawFlash more closely examines SECURE 2.0’s provisions aimed to increase retirement savings by promoting new ways for employees to receive matching contributions.

As described in prior LawFlashes, SECURE 2.0 expands the opportunities for participants to increase their retirement savings by making additional employee contributions or for employers to increase participant contributions through automatic enrollment and escalation features.

This LawFlash explores opportunities to increase retirement savings through new “matching” contribution features, including optional matching contributions for student loan payments, contributions to an in-plan emergency savings account, as well as a “saver’s” matching contribution.

Matching Contributions for Student Loan Payments

SECURE 2.0 expands an existing Internal Revenue Service (IRS) ruling position and establishes rules permitting employers to make matching contributions to employees on the basis of qualified student loan payments. These new rules are effective for plan years beginning after December 31, 2023 and apply to 401(k), 403(b), and governmental 457(b) plans.

Before SECURE 2.0, an employer could not make matching contributions to a plan on the basis of student loan repayments because of a technical rule (the so-called “contingent benefit rule”), which generally provides that a 401(k) plan may not provide benefits that are contingent on an employee’s election to make or not make elective contributions to the plan.

There is an express exception for employer matching contributions but, before SECURE 2.0, the exception was available only for matching contributions made on elective contributions to the plan and did not extend to matching contributions made on student loan payments made outside of the plan.

In 2018, the IRS issued a Private Letter Ruling (PLR) which provided a work-around of sorts. The PLR permitted a plan to base nonelective employer contributions on student loan repayments without violating the contingent benefit rule if certain requirements and conditions were satisfied. (See our blog post discussing the PLR in more detail.)

However, PLRs are only binding between the requesting taxpayer and the IRS, and may not be relied upon by other taxpayers. In addition, the PLR did not address or provide any relief for nondiscrimination concerns raised by providing a nonelective employer contribution to a limited subset of a plan’s participants.

For these reasons, many plan sponsors were reluctant to adopt similar student loan repayment programs, particularly as there seemed to be growing support for a more complete legislative solution.

Plan sponsors’ patience was rewarded and, for plan years after December 31, 2023, eligible plans can provide matching contributions on the basis of an employee’s “qualified student loan payments” made outside of the plan. However, certain rules and requirements must be satisfied, as follows:

• Only Certain Loan Payments Are Qualified. Qualified student loan payments include payments for a “qualified education loan” that is incurred by the employee to pay “qualified higher education expenses” for attendance at an “eligible education institution.” These terms are all defined in SECURE 2.0 and may not encompass all types of loans for attendance at all types of post-secondary educational institutions. However, it appears that a loan “incurred by the employee” could include not only a loan for the employee’s own education expenses, but also a loan taken by the employee for qualified higher education expenses of the employee’s spouse or dependent.
• Limit on Amount of Loan Payments. The maximum amount of loan payments that can be treated as qualified student loan payments in any year is capped at the applicable elective deferral limit under Section 402(g) of the Internal Revenue Code of 1986, as amended (the Code) (e.g., $22,500 for 2023) or, if less, the amount of the employee’s compensation for purposes of applying the Code Section 415 annual additions limit. However, this maximum amount is reduced by any elective deferrals that an employee contributes to the plan. As such, the combination of the employee’s elective deferrals to the plan and the qualified student loan payments may not exceed the Code Section 402(g) elective deferral limit.
• Employee Certification. Employees must certify annually that they have made qualified student loan payments and the amount of such payments. Importantly, plan sponsors are permitted to rely on an employee’s certification and need not conduct an independent evaluation as to whether the payments meet all of the requirements to be qualified student loan payments.
• Matching Contribution Requirements. The matching contributions made on the student loan payments must satisfy certain requirements, including that (1) the same rate of match must apply to both student loan payments and elective deferrals made to the plan; (2) employees must otherwise satisfy the plan’s eligibility requirements to receive a matching contribution on elective deferrals to the plan; (3) all employees who are otherwise eligible to receive a matching contribution on elective deferrals to the plan must be eligible to receive a matching contribution on student loan payments; and (4) the same vesting rules must apply for both matching contributions on elective deferrals and matching contributions on student loan payments.
• Nondiscrimination Testing Rules and Requirements. The matching contributions must satisfy certain nondiscrimination testing requirements, but SECURE 2.0 established relatively favorable rules in this regard. In particular, (1) qualified student loan payments may be treated as elective deferrals for purposes of determining whether nondiscrimination testing safe harbors are satisfied; (2) as a plan feature, matching contributions on qualified student loan payments generally will be treated as being available to all participants, including participants who do not have outstanding student loans; and (3) plan sponsors may apply the annual deferral percentage tests separately to those participants who receive matching contributions on account of qualified student loan payments.

Morgan Lewis Observations

Adopting a student loan matching contribution feature is optional, but employers looking for creative ways to attract and retain employees may be interested in offering such a feature. SECURE 2.0 removes many of the preexisting legal barriers and administrative complexities that may have discouraged some employers from adopting a student loan repayment feature.

In particular, the self-certification feature and favorable nondiscrimination testing rules substantially simplify and streamline the administrative requirements for offering such a program. However, there are still open questions and administrative issues to address.

For example, the timing and frequency of matching contributions on qualified student loan payments may raise administration questions and issues. That is, while employee certification on qualified student loan payments is only required once annually, employers and employees may want to make matching contributions periodically throughout the year.

In addition, employers may be uncomfortable with relying solely on self-certification and may want some sort of substantiation or to even use payroll deductions for loan repayments. None of these issues are insurmountable, and SECURE 2.0 directs the IRS to issue regulations that will (1) permit a plan to make matching contributions on qualified student loan payments at a different frequency than matching contributions on elective deferrals, and (2) establish reasonable deadlines and procedures for employees to claim matching contributions on account of qualified student loan payments.

However, plan sponsors interested in adopting a student loan payment program for 2024 should start working with their plan recordkeepers and other providers now so they are well positioned to react to the guidance once issued.

Emergency Savings Accounts Linked to Retirement Plans

Effective for plan years beginning after December 31, 2023, 401(k), 403(b), and government 457(b) plans may offer new in-plan emergency savings accounts to participants who are not highly compensated employees.

Referred to as a “pension-linked emergency savings account” (PLESA), the new feature would allow eligible employees to make Roth after-tax contributions to an eligible plan up to a specified amount (currently $2,500, but indexed for cost-of-living increases in future years) and then readily withdraw the amounts without needing to satisfy any particular rules or requirements.

Under current rules, in-service distributions of elective deferrals or Roth contributions from a plan are restricted by age (e.g., not available before age 59½) or the need for a participant to demonstrate the existence of a specified hardship event (e.g., expenses resulting from a federally declared disaster, medical expenses, expenses to prevent foreclosure/eviction).

As such, employees currently do not have ready access to in-plan savings to address common short-term emergencies that may arise on a day-to-day basis (e.g., unexpected car repairs, difficulty in paying for groceries or other living expenses following a spouse’s job loss), but do not fit within the narrow range of specified hardship events.

The new PLESAs are intended to provide eligible employees with a convenient in-plan savings feature that will encourage savings while also providing immediate access to funds to address emergency needs that may arise. PLESAs must satisfy certain rules and requirements, as follows:

• Only Available to Eligible Participants Who Are Not HCEs. PLESAs can only be made available to employees who satisfy the plan’s age and service eligibility requirements and who are not highly compensated employees (HCEs). In general, an HCE is an employee who is a 5% or more owner of a company or has compensation in the preceding year that exceeds an indexed limit (e.g., an employee with $150,000 or more of compensation in 2023 will be treated as an HCE for 2024).
• Roth Contributions Only. All contributions to a PLESA must be Roth after-tax contributions; pretax contributions or employer contributions are not permitted.
• Automatic Contribution Features Permitted. Plan sponsors may choose to implement a PLESA with an automatic enrollment feature, but the automatic enrollment percentage must be at a rate of 3% or less.
• Contribution Rules and Limit. An employee’s contributions to a PLESA may not cause the account balance to exceed the $2,500 (as indexed) contribution limit. However, earnings on contributions may cause the account to exceed the limit. In addition, contributions to a PLESA count toward the Code Section 402(g) limit on elective deferrals ($22,500 for 2023), and a PLESA may not impose a minimum contribution or other account balance requirement. However, a plan sponsor could establish a PLESA contribution limit that is less than $2,500.
• Matching Contributions. For plans that provide a matching contribution, an employee’s contributions to a PLESA must be eligible for matching contributions at the same matching rate established under the plan as for non-PLESA elective deferrals. Any such matching contribution will be contributed to the retirement savings portion of the plan and not the PLESA.
• Investment Requirements. A PLESA must be invested in an interest-bearing deposit account or an investment product offered by a state or federally regulated financial institution that is designed to preserve capital and generate a reasonable rate (e.g., a stable value or money market fund). Participants who contribute to a PLESA will be treated as exercising investment control over their accounts for purposes of fiduciary relief for participant-directed investments.
• Withdrawal/Distribution Rights. Balances in a PLESA must be available for distribution at least once per month, and a distribution must be made as soon as practicable following a participant’s request. Participants do not have to provide a reason for the withdrawal and must not be charged any withdrawal fees or charges for the first four withdrawals made from the account in a year. In general, distributions from a PLESA are (1) treated as qualified Roth contributions (which means earnings are not subject to taxation), (2) not eligible for rollover, and (3) not subject to the 10% early distribution penalty tax. However, distributions from a PLESA upon an employee’s termination of employment or termination of the PLESA feature would be treated as an eligible rollover distribution in most instances.
• Participant Notice Requirements. Participants must receive an initial notice at least 30, but not more than 90, days before the effective date of their first contribution to the PLESA and annually thereafter. The notices must contain detailed information describing the terms and features of the PLESA, contribution rules and limits, investments, withdrawal procedures and limits, etc. The notice may be consolidated with other notices such as notices relating to a plan’s qualified default investment alternative or safe harbor status.
• More Guidance to Come. Both the Department of Labor and IRS have authority to issue regulations and other guidance on a range of issues under the PLESA provisions in SECURE 2.0, and additional guidance is expected in the coming months.

Morgan Lewis Observations

Some plan sponsors have explored or offered “outside-the-plan” emergency savings account programs, and the in-plan PLESA option may be an attractive alternative. However, as described above, there are numerous design rules and requirements that a PLESA must satisfy and many administrative and operational complexities to consider. What’s more, given the relatively modest maximum PLESA contribution limit (initially $2,500 and then indexed), plan sponsors may be reluctant to take on this complexity.

Plan sponsors also will want to consider how PLESAs might impact employees’ long-term retirement savings, as the contributions reduce the other pretax and Roth contributions that can be made to a plan and that are subject to more significant distribution restrictions (thereby encouraging savings until retirement). Finally, we note that while PLESAs can be offered as early as 2024, retirement plan recordkeepers may need more time to establish the recordkeeping infrastructure necessary to administer the PLESAs.

Saver’s Matching Contribution

Effective for tax years beginning after December 31, 2026, SECURE 2.0 substantially changes and updates the existing “saver’s tax credit.” As revised by SECURE 2.0, the tax credit is converted to a government-funded matching contribution (up to a maximum amount of $1,000) that a taxpayer may direct to be contributed to an eligible retirement plan (a 401(k), 403(b), or governmental 457(b) plan) or individual retirement account (IRA) designated by the taxpayer and that accepts the contributions.

Importantly, the new saver’s matching contribution is an optional plan feature and plan sponsors are not required to accept the saver’s matching contribution.

nder existing law, the saver’s tax credit is a tax credit that may be taken by certain lower-income eligible individuals (e.g., for 2023, taxpayers with adjusted gross income (AGI) of $34,000 if single or married filing separately, $73,000 if married filing jointly) who made an eligible contribution to their qualified retirement plan or IRA.

The credit is based on a tiered percentage system (0%, 10%, 20%, or 50% of contributions), based on AGI and filing status, with the amount of their contributions taken into account capped at a maximum of $2,000 for single filers ($4,000 if married filing jointly) and reduced by certain distributions that are taken by the individual. The credit cannot be greater than the taxpayer’s tax liability, and is claimed by taxpayers when they file their annual tax return. As such, the current saver’s tax credit does not have any direct impact on a taxpayer’s retirement plan or IRA.

Starting with tax years beginning after December 31, 2026, an eligible taxpayer will be able to receive the credit as a direct government-funded matching contribution to the eligible retirement plan or IRA designated by the taxpayer. There are certain rules and requirements that apply to the saver’s matching contribution, as follows:

• The contributions taken into account to calculate the saver’s match include elective deferrals or voluntary after-tax contributions to a 401(a), 403(a), 403(b), or governmental 457(b) plan and the saver’s match is reduced by certain distributions (including distributions taken by a spouse if filing jointly) taken during the current year and the preceding two years.
• The saver’s match may not be contributed to a Roth account, and the contribution will not count against annual contribution limits (e.g., the Code Section 402(g) limit on elective deferrals ($22,500 for 2023) or for nondiscrimination testing purposes).
• The amount of the saver’s match will be determined by the federal government in accordance with the applicable rules and the plan will not have any role in determining the amount or accuracy of the saver’s matching contribution. However, once the matching contributions are in the plan, the plan administrator will be responsible for reporting these contributions on the plan’s Form 5500 annual return.

Morgan Lewis Observations

The key observation for plan sponsors is that the saver’s matching contribution is optional and plan sponsors will be able to decide whether to accept the saver’s matching contributions or not.

Given the relatively modest dollar amount of the saver’s match (currently $1,000), some plan sponsors may determine that the administrative burden and complexities may not make it worthwhile. However, given the delayed effective date (tax years beginning after December 31, 2026), plan sponsors need not take any immediate action and have ample time to decide whether it makes sense to accept saver’s matching contributions or not.

Presumably, future guidance from the IRS will clarify the rules and procedures that will apply to the saver’s matching contributions and plan sponsors will have a better understanding of the issues and complexities that might be associated with accepting the saver’s matching contribution.

Visit our centralized portal, which aggregates our insights and analyses of SECURE 2.0.