Employer student loan repayment vs 401(k) student loan matching

If you’re an employer looking to add some form of student loan assistance to your employee benefits packages, you may be weighing between employer student loan repayments versus a 401(k) match against student loan payments. We’ve put together a comparison of both benefits to help you make the decision that’s right for you and your employees.
The Highway Team
The Highway Team
Updated
Published
March 20, 2024

Post Summary

  • Employer student loan repayments and a student loan 401(k) match are two fantastic and impactful benefits that employers can offer to support employees with student loans
  • Tax-free employer student loan repayments will make a serious impact on employees’ student loan burden while also helping companies achieve their talent goals. 
  • Student loan 401(k) matching is a great option to help improve the financial wellness of those employees who can’t save for retirement because of their student loans.
  • Which benefits to offer will ultimately depend on the company and its goals, but employers could always offer both. 

Now that working Americans across the country are worrying about making their student loan payments again, conscientious employers may be looking for ways to offer some form of student loan support as a benefit. Luckily, employers have a few flexible options to choose from. 

Since the passage of the CARES act in 2020, employers have been able to offer tax-free employer student loan repayments as a benefit. And now that a provision in Secure Act 2.0 has gone into effect (as of January 1, 2024), employers can now also offer a 401(k) match against student loan payments. 

In this post, we’ll compare these two impactful benefits, employer student loan repayments and a student loan 401(k) match, to help interested employers make an informed decision. 

Employer Student Loan Repayment Benefit

What is it? 

Student loan repayment (SLR) benefits are a type of tax-free educational assistance benefit that falls under Section 127 of the IRC. 

Through a student loan repayments benefit, companies can contribute directly to employees’ student loan account(s), or reimburse employees for student loan payments made, to help alleviate the burden of student loans and improve their financial wellness.  

How does a student loan repayment benefit work? 

With a written educational assistance plan, employers can offer student loan assistance as a benefit either as a reimbursement for past payments made (under a tuition reimbursement plan) or as direct contributions to employee’s student loans (i.e. as an “employer student loan repayment benefit” or “employer student loan contributions benefit”). 

As long as the benefit plan is compliant with the rules set forth in Section 127 of the Internal Revenue Code, this student loan assistance benefit is tax-free for both employees and employers (e.g. not subject to income taxes for employees nor payroll taxes for employers).

When it comes to actually managing the benefit, companies can work with a vendor, like Highway Benefits, to verify employees’ student loans and manage monthly contributions, or they can self-administer their plans. 

An overview of the benefits of employer student loan repayments

Why should companies offer a student loan repayment benefit? 

A student loan repayment benefit is one of the best benefit dollars that a company can spend, especially if they’re interested in adopting some form of a student loan assistance benefit. 

This highly impactful and flexible benefit is a win-win for employers and employees alike. With custom plan rules and tax-free contributions, companies can create sustainable benefit plans that: 

  • make a serious impact on their employees’ financial well-being
  • while also helping companies achieve their top talent goals. 

Since the contributions are tax-free (up to $5,250 per employee per year), every dollar that a company decides to contribute to an employee’s student loans will go, 100%, towards paying down the employee's student debt obligation. When these contributions are treated as additional payments, an employer student loan repayment benefit can help employees shave years off their loan payment schedule, save thousands of dollars on principal and interest payments, and become debt-free much sooner.

For companies, a student loan repayment benefit is a powerful tool when it comes to attracting and retaining top talent, thanks to its customizability and desirability. Under Section 127, companies have a lot of flexibility in crafting eligibility rules for their benefit plans. As long as the benefit does not discriminate in favor of highly compensated employees (“HCEs”), companies can leverage custom benefit plan rules, based on factors like tenure, department, title, etc, to promote attraction and retention of top talent. 

What are some other considerations around offering a student loan repayment benefit? 

A student loan repayment benefit is a fantastic benefit for companies to offer, but before adopting one, employers may want to assess their employee population to understand how many people within the company have student debt and what the average amount of student debt is per employee.

This will help inform: 

If you need help surveying your employee population, talk to our team! Highway can help you find out exactly how many people in your company have student debt and assist you in setting up a plan that meets your needs and constraints. 

Student Loan 401(k) and Retirement Plan Match

What is a student loan payment retirement plan match? 

A student loan payment retirement match, or “student loan 401(k) match” for short, is a subcategory of a 401(k) match (or similar retirement plan match). 

What’s a 401(k) (or similar retirement plan) match? It’s when employers decide to make annual contributions to an employee’s company-sponsored retirement savings account (e.g. 401(k), 403(b), SIMPLE IRA, 457(b) plan, etc) based on how much the employee contributes annually. 

Prior to this year, companies used to only be able to match “elective deferrals” (money that employees voluntarily choose to take out of their paycheck and put into an employer-sponsored retirement savings plan). However now, as of Jan 1, 2024, employers that wish to can also match against employees’ annual student loan payments. 

How does student loan payment matching work? 

Thanks to Secure Act 2.0, employers offering 401(k) or similar retirement plans can now treat employees’ student loan payments as elective deferrals for the purposes of making matching contributions to an employer-sponsored retirement plan. 

Employers will need to update their 401(k) plan policies and work with their retirement plan provider and/or record keeper to implement a student loan payment match. If an employer already offers some form of retirement matching, this process may be as straightforward as updating their plan policy and working with their provider or record keeper to support the match (although it may be worth noting that different providers and record keepers may have different methods of supporting the match); if not, employers will want to work with their providers, finance teams, and all necessary stakeholders to update their retirement plan policy to add a match. 

Description of Student loan 401k match benefits

Why should companies offer a student loan 401(k) match? 

For companies that already offer a 401(k) match, extending it with a student loan payment match could be a simple way to help boost the financial wellness of any employees who aren’t able to save for retirement (or max out their retirement plans) because of their student debt obligations. 

How many people could this actually affect? 

According to various sources, approximately 3 out of 4 employees with student debt don’t max out their retirement savings plan. In 2020, Fidelity estimated that 18% of employees with student debt did not contribute, specifically, to a 401(k) plan at all because of their debt. A survey by Achieve found that an estimated 30% of people with student debt haven’t saved for retirement at all.

As ~30% of the American workforce has student debt, by adding a student loan 401(k) match, companies could theoretically help ~5-9% of their employees start saving for retirement and additional ~13-17% contribute more in retirement savings to their employer-sponsored retirement plans. 

By adding a student loan 401(k) match, companies could theoretically help ~5-9% of their employees start saving for retirement and additional ~13-17% contribute more in retirement savings to their employer-sponsored retirement plans. 

These numbers will vary based on what proportion of a company’s employee base has student debt and/or the structure of the retirement plan match. Some employees with student debt, who are currently contributing to their 401(k) or similar retirement plan, could already be taking full advantage of their company’s match without maxing out their retirement plan.  

What are some other considerations around offering a student loan 401(k) match? 

Assuming the company already offers a 401(k) match, employers may also want to assess their employee population to understand how many people within the company have student debt and how it’s currently impacting 401(k) participation rates before they extend their match to student loan payments.

Some questions companies may want to think through include: 

  • How many employees are not contributing at all to their 401(k) because of their student debt? 
  • How many are not contributing for other reasons not related to student debt? 
  • Where is the company hoping to make the most impact on employees’ financial well-being? 
  • How would you manage the match if an employee is already contributing to their 401(k) and is also making student loan payments? 
  • Will you allow employees to self-certify when they make payments or rely on other verification methods? 
  • How often will you match the student loan payments? Monthly? Quarterly? Annually? 

Employer Student Loan Repayment vs Student Loan 401(k) Match 

Which is better: student loan repayment benefits or student loan 401(k) matching? 

You probably saw this coming, but it’s a trick question–both are fantastic benefits to use to attract & retain talent while promoting financial wellness (and companies can absolutely add both). 

If a company were to only choose one, which option they should choose will ultimately depend on the company’s goals, timeline, and benefits budget, and the characteristics of the employee population and applicant pool. 

For companies that want to improve their employees’ financial wellness by encouraging employees to save more for retirement, a student loan 401(k) match could be a great addition to an existing 401(k) (especially if the company already offers a match). While a student loan 401(k) match does not target student loans directly, it may help those employees with student debt save more for retirement. 

While a student loan 401(k) match does not target student loans directly, it may help those employees with student debt save more for retirement. 

For companies that want to improve their employees’ financial wellness and help tackle the student debt crisis, an employer student loan repayment benefit could be a great option to add. With an employer student loan repayment benefit, companies will be able to make a direct impact on employees’ student loans, helping them to either pay off their student debt sooner or divert more savings towards retirement, major life milestones, or other necessary living expenses. 

With an employer student loan repayment benefit, companies will be able to make a direct impact on employees’ student loans, helping them to either pay off their student debt sooner or divert more savings towards retirement, major life milestones, or other necessary living expenses. 

Companies prioritizing one option over the other because of cost concerns should note that the total cost of each benefit will ultimately depend on the structure of your benefit plan or 401(k) match.  

One last thing to consider: companies looking to recruit younger employees or employees that have a significant amount of student debt might find that an employer student loan repayment has a bit more of an edge when it comes to recruiting and retaining top talent–54% of young employees actually say they prefer a student loan repayment benefit to a 401(k)

If you are an employer interested in learning more about either employer student loan repayments or a student loan 401(k) match, Highway can help. Set up a call with our team today to learn more about your options.  

Disclaimer: This article is purely information and is not intended as financial or legal advice. For more in-depth questions related to US laws, the IRS Tax Code, Secure Act 2.0 provisions, your 401(k), etc, we recommend you speak to a specialized attorney or licensed financial expert. 

The Highway Team

The Highway Team is on a mission to spread knowledge about student loans, the state of the student debt crisis, and impactful benefits like employer student loan repayments. We're here as a helpful resources so drop us a line anytime. Find us on all the major channels as @highwaybenefits

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