Employers flirt with student loan matching

Of all the features employers can now add to their workplace retirement plans as part of the SECURE 2.0 Act, one stands out for Kraft Heinz Co.: the provision allowing it to make employer matching contributions to the 401(k) accounts of workers paying back student loans.

"It is at the top of the list," said Michael Jabs, Kraft Heinz's Chicago-based associate director of pensions, about the provision that his company is considering adding to its $3.5 billion 401(k) plan.

"We continue to attract young talent, and I think we want to really focus on attracting and retaining good young people at Kraft Heinz."

Mr. Jabs explained that student debt is an issue for many employees and that it often prevents them from contributing to their 401(k) retirement accounts.

"While we would love to continue to encourage our participants to save for retirement, we recognize there might be some more pressing needs," he said.

The provision allows employers to make matching contributions for student loan repayments, meaning employees not contributing to their accounts can now get a match if they're paying back their student debt.

While employers could have implemented the feature prior to SECURE 2.0 — and some actually did — it was difficult and expensive to do so because of technical issues, particularly around non-discrimination testing, which the current legislation resolves.

"It's a general acknowledgment that the financial landscape for our employees is quite a bit more complicated I would say than it used to be," Mr. Jabs said of the provision that employers can begin implementing as soon as next year.

Many other employers are thinking along the same lines, according to industry observers.

Like Kraft Heinz, employers are considering implementing the provision because they want to maintain or gain a recruiting and retention edge, particularly if they have a young workforce. Many employers see it as the right thing to do because some employees — both those just out of school and those in the workforce for years — are so buried in college loan debt that they can't contribute to their retirement accounts and are missing out on the match.

"I would say that it is certainly among the provisions that is getting the most interest from plan sponsors," said Holly Verdeyen, a partner and U.S. defined contribution leader at Mercer in Chicago.

Ms. Verdeyen explained that the interest is tied to employees' overall financial wellness and a "realization that one of the reasons that employees don't contribute to their 401(k) plans is the fact that they can have outside debt."

Still, the provision presents cost and administrative challenges that employers must weigh. Plan sponsors need to lean into their record keepers and other service providers to make system and process adjustments, said Curt Young, a partner of retirement solutions at Aon PLC in Charlotte, N.C.

"There are administrative things to really think about," Mr. Young said, referring to the high level of coordination with record keepers and payroll providers.

Cost is another consideration.

"It can be — depending on your workforce — a material expense," said Kent Mason, a partner at Davis & Harman LLP in Washington. "It is an expense because you are matching people who otherwise would not get a match."

Employers are also concerned about potential adverse participant behavior. For example, participants with student loan debt who are contributing to their retirement plan accounts could potentially stop contributing, Aon's Mr. Young said.

"A potential adverse reaction is the participant saying, 'well, I don't need to contribute to the retirement plan anymore because I will still receive the match," Mr. Young said, referring to contributing participants with student loans.

Ms. Verdeyen agreed, saying that such behavior could harm participants' retirement readiness.

Ms. Verdeyen often tells employers that having a high percentage of employees with student loan debt doesn't necessarily mean they should consider adopting the feature.

A better metric, she said, might be the percentage of employees with student loan debt who are either not contributing to their retirement accounts or not contributing up to the match.

"While this provision sounds very appealing, companies should really think about who in their employee base is in need of this feature," she said. "The provision was meant to address participants who because of their student loan debt aren't contributing to their plans."

Some employers also worry that participants will fail to certify their student loan repayments in the way required of them to get the matching contribution, Ms. Verdeyen added.

There's concern that participants may not "do all the steps needed to receive those contributions" in much the same way that people leave millions of dollars every year in their flexible spending accounts because they don't complete the paperwork needed to receive the FSA reimbursement, she said.

Another consideration revolves around the participants' self-certification of the student loan payments. Employers are not required under SECURE 2.0 to get documentation proving that employees made the payments.

"They don't even have to know for sure the person has a loan," Davis & Harman's Mr. Mason said.

Still, employers will need to decide whether they will require some documentation to verify employees' student loan repayments, even though employers don't need to take that extra step.

"It's not just preventing excessive cost but it's also equity," Mr. Mason said. "If some person is claiming to be repaying a loan when they're not, they're getting more match than their colleague who is being responsible."

Mercer's Ms. Verdeyen echoed the concerns.

"They're trying to make it easy with self-certification, but I think it's going to be really up to the employers on what kind of protocol they would want to put around these certifications of student loan repayments."

For Kraft Heinz's Mr. Jabs, the decision on whether to ask for additional documentation was easy.

If his company were to implement the provision, it would stick to employee self-certification of the student loan payments. Otherwise, it would be "too much of an administrative hurdle," he said.

The worry of people not telling the truth doesn't outweigh the administrative headache of making sure they were being honest, he said.

Finally, there's the nagging matter of pending regulatory guidance regarding the matching of student loan debt repayments at a different frequency than the matching on salary deferrals, Mercer's Ms. Verdeyen said.

Most people have a pay period match, which doesn't work with a student loan match because employers will likely ask employees for an annual year-end self-certification of their student loan payments.

While SECURE 2.0 directs the Treasury Department for guidance permitting a plan to make matching contributions for student loan payments at a different frequency, it's not certain when the guidance will come, Ms. Verdeyen said.

"We're still awaiting some additional guidance that was directed in SECURE 1.0 at the end of 2019," she said.