Your employer can now match your student loan payments to your 401(k), but it may not be right for everyone

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• Getting free retirement funds from your employer is great, but it won't be useful for everyone.
• Look into your employer's vesting schedule if you choose to use this benefit.
• The CARES Act also allows employers to contribute to student loans, which may be better.

The Secure 2.0 Act brought about a new list of retirement plan rules when it was passed into law in December of 2022, although some of the legislative changes didn't go into effect until the beginning of 2024. This includes a new provision of the legislation that lets employers match funds into eligible retirement accounts based on employee payments on their student loans.

Employers who opt into this plan can consider an employee's student loan payment as the basis for an employer "match" into an eligible workplace retirement plan like a 401(k), which paves the way for workers to pay down student debt and save for retirement at the same time.

But is this really a good idea? That may depend on who you ask and what the alternatives are, but experts agree there are upsides and serious downsides to consider for workers who receive this benefit.

Borrowers with limited funds can stretch their money further

Financial advisor Marcel Miu of Simplify Wealth Planning says that a significant advantage of getting student loan matching funds into a retirement account is the ability to build retirement savings even while focusing on paying down student debt.

This provision essentially allows workers to "double dip" with their student loan payments, he says, meaning they are paying off their loans while simultaneously growing their nest egg without having to split their limited financial resources between the two.

This can also be a motivational boost since the match could encourage employees to make student loan payments consistently since they're also receiving some benefits for retirement.

It's not a great deal for income-driven repayment plans

Millions of borrowers are repaying their federal student loans on income-driven repayment plans. These plans base student loan payments on income and family size, and there are many situations where borrowers with relatively low incomes qualify for a $0 monthly payment.

Take the new SAVE Plan from the Biden administration, for example, which has higher thresholds to qualify for a $0 monthly payment than other income-driven plans. According to the US Department of Education, 2.9 million borrowers who enrolled in this plan as of late last year were paying $0 monthly payments.

Workers who have a $0 monthly payment on student loans wouldn't qualify to receive matching funds to retirement through an employer with this provision in the Secure 2.0 Act.

They could, however, qualify for a traditional match on contributions to a workplace retirement plan if they save for retirement and their employer offers this benefit as an alternative.

Watch out for vesting schedules

Financial advisor Daniel Cieniewicz of Hyperion Financial says that not all employers have chosen to adopt this provision due to a lack of interest and complexity surrounding the law. And even among those that do, workers should watch out for vesting schedules and other requirements to receive their match.

Vesting percentages means the employer's contributions may require an employee to stay employed at the company in order to have the employer-contributed funds "vest," said the advisor.

"Otherwise, if an employee leaves prior to the funds vesting, the funds are forfeited back to the company."

Watch out for tax consequences

Student loan borrowers should also be aware of the tax consequences involved in accepting this benefit from an employer, whether good or bad. First off, Miu says that although student loan debt is paid with after-tax earnings, there is a student loan interest deduction.

"Student loan borrowers can deduct up to $2,500 in interest paid each year," he said.

Single borrowers with an AGI under $75,000 are eligible for the full benefit, as are joint filers under $155,000. The ability to take this deduction phases out completely for single filers who earn $90,000 or more and married taxpayers filing jointly who earn $185,000 or more a year.

This means borrowers who make student loan payments may be able to deduct the interest they pay (up to the limits) each year, no matter what.

On the flip side of that, there are tax consequences that come with not contributing directly to a tax-advantaged retirement account like a 401(k). Cieniewicz points out that pre-tax retirement plan contributions lower an individual's adjusted gross income, thus saving on federal taxes.

"By making these contributions to a student loan rather than a retirement plan, you could be forfeiting this benefit," he said.

There are alternatives

While letting an employer match student loan payment amounts (or part of them) into an eligible workplace retirement plan can lead to getting "free money" and give you a boost toward retirement when you couldn't otherwise afford to save, there are other ways for employers to help out in this realm.

Specifically, Patricia Roberts of Gift of College says that employers can also make direct payments to student loans for their workers pursuant to the CARES Act and as extended by the Consolidated Appropriations Act, 2021.

"These permitted payments of up to $5,250 per employee, per year are fully tax-free to the employee on whose behalf they are made and can be made through December 31, 2025, unless extended by Congress," she said.

While offering this benefit wouldn't help workers save for retirement, it could help them get out from under the burden of crushing student loan debt considerably faster. With debt out of the way or at least under control, those employees may have more bandwidth to start saving for retirement on their own.