I. SECURE 2.0: The Language of the Legislation
Congress has long grappled with creative ideas to provide working Americans solutions to save for retirement. In 2022, the House and Senate introduced retirement legislation that garnered bipartisan support and was eventually combined into SECURE 2.0. SECURE 2.0 was attached to the Consolidated Appropriations Act of 2023, and it includes numerous provisions aimed at building upon the SECURE Act of 2019 that make it even easier for all Americans to save for retirement. One provision is particularly noteworthy: “treatment of student loan payments as elective deferrals for purposes of matching contributions.” This student-loan match benefit is covered in section 110 of the Act, which spans multiple pages and illustrates how the benefit will interact with ERISA and the Internal Revenue Code.
In essence, the benefit allows an employer to use an employee’s student-loan payment receipt to provide a matching contribution to that employee’s retirement account, even if the employee is incapable of making their own contributions. The House Ways and Means Committee described the benefit as “intend[ing] to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions from their retirement plans.” If the benefit is utilized as intended, it will allow employees to kill two birds with one stone by paying off student loans while simultaneously growing their retirement funds. While SECURE 2.0 passed before the year-end of 2022, its provisions have varying effective dates. The student-loan match benefit will be available to plan years beginning in 2024. Therefore, workplaces looking to hire employees—especially employees who are entering the workforce with student loans—may be able to attract talent by offering this innovative benefit. Although the benefit is optional for employers, it may soon be demanded by higher education graduates who are financially restrained in contributing to both reducingtheir debt and building their equity.
Indeed, the outstanding federal loan balance in the United States has climbed to over $1.5 trillion, encompassing over 42.8 million borrowers. The average federal student-loan debt balance, including private loan debt, is estimated to be $40,000. At the same time, too few Americans have retirement accounts. In 2020, only 58.1% of working-age baby boomers, 56.1% of generation X, 49.5% of millennials, and 7.7% of generation Z had at least one type of retirement account. This new benefit will allow employees to focus on paying off their student-loan debt without sacrificing making contributions and receiving an employer match to their retirement accounts. Research has shown that households headed by a person aged thirty-five or less with a college degree but without student-loan debt have median defined contribution account balances of $30,000. In comparison, similar families with student-loan debt have just $15,000 in their accounts. It is crucial to save for retirement early to take advantage of compounding interest, so this new student-loan match benefit has the ability to make a dramatic impact on the future retirement success of borrowers.
Focusing on the retirement success of employees with student loans, the legislation provides the following framework: an employee makes a payment to their “qualified student loan” as usual, the employee submits receipt of that payment to their employer, the employer treats this payment as if it were the employee’s “contribution” to their retirement account, and the employer uses that amount to determine its own contribution to the employee’s retirement fund in accordance with the amount of salary contribution that it would have matched. The provision would allow this benefit for defined contribution plans, including 401(k) plans, 403(b) plans, SIMPLE IRAs, and even governmental 457(b) plans. The legislature’s intent is to interpret “qualified student loan payment” broadly under the Act to include “any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.”
The legislation allows “employer contributions made to a defined contribution plan on account of a qualified student loan payment” to be treated as a matching contribution, subject to specific requirements. First, the plan must provide “matching contributions . . . of elective deferrals at the same rate as . . . qualified student loan payments.” This means that the employer match for traditional plan contributions and for student-loan matching contributions must be equal and cannot exceed the traditional match requirement. The plan must offer the benefit to employees who are “eligible to receive matching contributions on account of elective deferrals” and who are “eligible to receive matching contributions on account of qualified student loan payments.” Here, Congress prohibits employers from forcing employees to choose between a traditional elective deferral plan or a student-loan matching plan. In other words, all employees must have the ability to take part in both retirement programs. Finally, the plan must provide that matching contributions on behalf of the student-loan payment benefit, and elective deferrals vest the same. This vesting parity requirement safeguards against employers having differing vesting periods for traditional elective deferral plans and student-loan matching plans, which would make one plan much more attractive than the other by allowing varying “ownership” timelines over employees’ retirement accounts.
Interestingly, this benefit appears to occupy a middle ground between a retirement benefit and a tuition benefit. Since ERISA traditionally governs the former but not the latter, this Note will refer to the benefit as a “hybrid” benefit. Where traditional employer-funded tuition benefits would be subject to state law actions, this hybrid benefit, because of ERISA’s preemption provision, will now only be subject to ERISA’s specifically prescribed remedies. Unfortunately, ERISA’s remedies are sparse and frequently leave employees harmed by mismanagement of plan assets without suitable avenues to recover. Thus, ERISA preemption will have an adverse impact on this hybrid benefit.
ERISA’s preemption doctrine often acts like a vacuum in two senses, sucking state law remedies into its domain but neglecting to replace those state laws with any substantive federal remedies, leaving an absence of regulation in its wake. That vacuum in the first sense takes with it breach of contract lawsuits, public policy rooted in state laws, a litigant’s ease of access to the courts, and a range of other remedies, resulting in a vacuum in the second sense. As a consequence, expansive ERISA preemption has negative implications, specifically in regard to a hybridized benefit such as this novel student-loan match benefit.
II. Hybrid Implications Under ERISA’s Domain
As mentioned above, ERISA preemption can negatively affect employees’ recovery of unpaid or mismanaged benefits. And unfortunately, this new “hybrid” benefit will inevitably fall victim to ERISA’s broad preemption language.
First, this benefit will be subject to ERISA because the employer match is being directly contributed to a retirement plan. ERISA states that an employee pension benefit plan and a pension plan mean “any plan, fund, or program . . . established or maintained by an employer or by an employee organization . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program . . . provides retirement income to employees.” Because the student-loan match benefit will result in the employer match being contributed to employee retirement accounts, which will ultimately provide retirement income to employees, the benefit is subject to ERISA.
As a result, it will be preempted by ERISA’s strong preemption scheme. ERISA itself states that its provisions “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . . .” Based on the language of precedential ERISA cases, the strict interpretation of ERISA’s “relate to” provision, and Congress’s ultimate intention of a comprehensive governing body of law for retirement plans, state law actions relating to tuition benefits will be displaced by ERISA’s remedies. And even though those remedies are lackluster, this consequence is irrelevant: state laws are displaced by whatever the federal statute provides, even if the federal law provides no or few substantive replacements. Preemption will thus interfere with this benefit by hindering employee recovery efforts.
However, traditional tuition assistance programs have not been subject to ERISA’s plan requirements because they are usually unfunded excess benefit plans. Unfunded plans provide benefits solely from employers’ general assets and accept no employee contributions; therefore, ERISA preemption does not usually apply. Excess benefit plans are plans “maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by section 415” of the Internal Revenue Code. Qualified scholarships, educational assistance programs, and working-condition fringe benefits are three avenues by which employers provide tuition and education benefits strictly under the Internal Revenue Code. While these excess benefits are tax deductible for employers, they narrowly escape ERISA’s preemption clause.
This “hybrid” benefit presents an issue by merging tuition benefits, traditionally not governed by ERISA, with retirement benefits, which traditionally are governed by ERISA. This novel benefit combination thus removes tuition benefits from state regulation and places them into the realm of federal regulation. However, federal law is overwhelmingly inadequate, even more so in relation to this student-loan matching benefit which has no tailored federal regulation. More worrying, Congress has the ability to continue “hybridizing” benefits, giving ERISA preemption more power than ever.
III. ERISA Preemption Concerns
Congress originally enacted ERISA to address public concern by protecting pension plan participants and beneficiaries from mismanagement and abuse of promised assets. Importantly, ERISA’s preemption clause has consistently been interpreted as expansive. This ensures uniform plan administration across state lines, so interstate employers need not comply with multiple and possibly conflicting state laws. Over the years, ERISA has been amended to meet the changing needs of employees to include not only pension benefits, but also welfare benefits, but that legislation has not been comprehensive, and the Supreme Court has decided complex ERISA issues to fill in gaps left unanswered by legislation. Constant piecemeal legislative updates create more gaps, and employees are left to seek guidance from the Court regarding their benefit plans.
To clarify the scope of its preemption, ERISA includes a “savings” clause, carving out some matters from preemption, and a “deemer” clause, pulling in some matters as preempted. The savings clause explicitly lists exceptions to what would otherwise be preempted. Notably, it saves any state law regulating insurance, banking, or securities. ERISA also does not preempt other federal laws, proclaiming that it shall not be construed to “amend, modify, invalidate, impair, or supersede any law of the United States.” The Supreme Court, too, has narrowed preemption in limited situations where joint federal and state enforcement is desired, stating that state laws which are not inconsistent with federal laws, might not be preempted. The deemer clause provides an exception to the savings clause. The deemer clause states that an ERISA plan cannot be “deemed” an “insurance company or other insurer, bank trust company, or investment company” for purposes of state law regulation, effectively preventing state laws from regulating self-insured ERISAwelfare benefit plans—particularly health plans.
Federal courts often struggle with the tensions of ERISA preemption because its limits have never been clearly defined by Congress. In particular, ERISA provides for two types of preemption: conflict and complete. Conflict preemption provides that ERISA bars any law that conflicts with ERISA or its goals. It is a substantive defense arising from the “relating to” language of ERISA. Complete preemption is narrower, essentially transforming state law causes of action into federal claims that allow for removal of state law cases to federal court, arising from ERISA’s civil enforcement provision. Although both are important to determining the viability and enforcement of state laws regarding benefits, this SECURE 2.0 student-loan match benefit will likely invoke a conflict preemption analysis, as state laws pertaining to the benefit will inevitably “relate to” employee benefit plans.
To determine whether ERISA will preempt state causes of action relating to tuition benefits, a court would first consider whether the law “relates to” an employee benefit plan. If the first part of the test is met, a court would next consider whether the law is saved from preemption under the savings clause. If saved, a court would determine whether the deemer clause applies. If the deemer clause does apply or the savings clause does not, the law will be preempted by ERISA. A state law relating to student-loan payments would directly relate to an employee benefit plan by using payments as contributions to a 401(a) plan, a plan subject to ERISA. The savings clause cannot exclude this benefit from preemption since it does not fall under the applicable exceptions: insurance, banking, and securities. The deemer clause is therefore also inapplicable. Under this analysis, state laws intended to regulate this benefit will be sucked into the ERISA preemption vacuum, and all that will be left are the disappointing protections of ERISA itself.
Again, courts often battle with the ERISA preemption analysis because the statute’s language requires significant interpretation. Over the years, the federal circuit courts and the Supreme Court have supplemented the above analysis with new factors to better interpret ERISA’s “relates to” language. Such additional factors include the following: whether the state law affects relations between primary ERISA entities; whether the state law impacts the structure of ERISA plans; whether the state law has intrastate or interstate impacts on the administration of ERISA plans; whether the state law has an economic impact on ERISA plans; whether preemption of the state law is consistent with other ERISA provisions; and whether the state law is an exercise of traditional state power. None of these factors is dispositive or determinative; nevertheless, courts sometimes use them to focus their analysis and come to a preemption decision. The overarching “relates to” language is still the driver of the court’s decision, so these factors frequently work in opposition to state laws because judges are hesitant to alter ERISA’s expansive preemption clause. Furthermore, ERISA’s “relates to” clause is essentially boundless: “[i]f ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course, for ‘really, universally, relations stop nowhere.’”
IV. Effect on State Laws Governing Tuition Benefits
As explained in Parts II and III, significant concerns arise if ERISA preempts state laws pertaining to tuition benefits. Currently, companies offer a variety of types of tuition benefits to employees, and ERISA does not yet apply to these “employer educational assistance programs.” The Department of Labor has issued multiple advisory opinions permitting scholarship programs, tuition reimbursement programs, and educational expense refund programs to escape ERISA’s definition of an employee welfare benefit plan. Because ERISA is inapplicable to these plans, employees can bring a state law action against their employer to recover these benefits if they are injured. ERISA’s applicability to new student-loan matching contribution benefit plans would prohibit traditional state actions, including, but not limited to, breach of contract, tortious interference with a contract, negligence, fraud, and promissory estoppel. This preemption might not be a problem if ERISA provided remedies similar to those available through these state court actions, but ERISA’s supplemented remedies lack substance, limiting employees’ available recovery and imposing strict procedures on those who pursue them. In Metropolitan Life Insurance Co. v. Taylor, the Supreme Court was clear: “[C]ommon law contract and tort claims are pre-empted by ERISA,” placing lawsuits to recover benefits “directly under § 502(a)(1)(B), which provides an exclusive federal cause of action for resolution of suits.” With all this of this enumerated power to displace fundamental state laws, one would think that the “exclusive federal cause of action” would provide numerous avenues for employees to recover, but that is not how it has played out in cases over the decades.
For example, a rather recent ERISA preemption case was decided based on the statute of limitations. In Loffredo v. Daimler AG, the Sixth Circuit held that ERISA preempted the Michigan statute of limitations, which was longer than the ERISA remedies provide. The plaintiffs, former Chrysler executives, had sued Chrysler’s parent company to recover their lost benefits under its retirement plan, alleging several state causes of action: fraud, promissory estoppel, and breach of fiduciary duty. The plaintiffs argued that the fraud claim escaped preemption because it relied on an “independent state-law duty to disclose that goes beyond the ERISA relationship.” Plaintiffs also argued that their promissory estoppel claim should either be allowed to be brought under ERISA itself or the Michigan state law. Further, they asserted that their breach of fiduciary duty claims were allowed to be brought against non-fiduciaries for damages. The court disagreed with all three of the plaintiffs’ arguments. First, the court held that the Michigan fraud law did not impose a legal duty independent of the plan relationship and thus was preempted. Second, the court held that, if ERISA permits a promissory estoppel claim, the Michigan law would impermissibly duplicate it, and if ERISA does not permit a promissory estoppel claim, the state law claim would be an “impermissible alternative to ERISA’s reticulated enforcement regime.” Finally, the court held that the facts of this case made breach of fiduciary duty unavailable under ERISA, and the plaintiffs could not “use state law to put back in what Congress has taken out.” The court went further to note that “Congress’s concern in preempting state laws under ERISA . . . was the impairment and modification of federal law, not state law.”
This case illustrates how difficult it can be to bring state law claims regarding ERISA governed retirement plans. Other states’ laws may also have a longer statute of limitations period than the corresponding ERISA limitations period for bringing contract actions. Customarily, a contract action would be an appropriate avenue for an employee to recover unpaid tuition benefits promised by his or her employer. However, as mentioned above, ERISA will govern this student-loan match benefit, and ERISA preemption will disappointingly displace state law actions to recover lost benefits. Under this precedent, the federal law’s time period will supersede the state law’s time period. Even worse, ERISA’s limitations period gives considerable deference to the employer. The Supreme Court has held that an employer, through the plan’s language, can set the limitations period as long as it is “reasonable.” This new student-loan match benefit, an ERISA-governed benefit, will replace state statute of limitation periods with the plan’s own limitations period for actions brought by employees to recover tuition assets that were not properly reflected in their retirement accounts. This advances ERISA’s policy to make administration uniform for national employers, but significantly diminishes ERISA’s purpose of protecting the interests of employees.
State employment laws prohibiting employers from making employees sign non-compete agreements provide another example of how ERISA preemption is often inadequate. Generally, private employers favor non-competes for various reasons, but even more so when offering tuition benefits to employees. By having an employee sign a non-compete coupled with a tuition benefit, it ensures that the employer will get repaid, at least in time, for the extra benefit it provides. Without it, an employee may obtain a degree with monetary support from their current employer but leave the company shortly after to pursue a different career path with their new degree. Currently, employers must be aware of state non-compete laws so as to not run afoul of them, which may result in offering the tuition benefit without these additional assurances from employees. The difficulty is that these laws prohibiting non-competes may now be preempted by federal law insofar as they “relate to” an employee benefit plan. The answer is likely no, as the non-competes do not specifically relate to employee benefit plans. However, there is an argument that they could, and employers might then require employees to sign non-competes in order for employees to participate in the student-loan match benefit.
V. Bringing an Action Under ERISA
ERISA’s remedial scheme is complex to understand, but its inadequacy is rather obvious. Under ERISA section 502(a), plaintiffs are limited to mere “appropriate equitable relief.” Where state contract actions provide for recovery of compensatory and punitive damages, ERISA removes these damages from claimants’ reach. Exhaustion of a plan’s administrative remedies can also be difficult for plaintiffs to satisfy along with acquiring a competent attorney to bring the action in federal court. Altogether, the barriers to bringing specific ERISA 502 and 503 claims are much higher than filing state law contract actions when tuition benefits have been mismanaged. The hybrid nature of this new student-loan match benefit will result in mismanaged benefits going unrecovered due to the complexity of bringing an ERISA action.
As an ERISA plaintiff, getting into court presents its own set of challenges. ERISA lists multiple causes of action under sections 502 and 503, but some are more common than others: denial of benefits; breach of fiduciary duty; equitable relief against non-fiduciaries to remedy violations of the act or plan; interference with participants’ exercise of ERISA rights; and damages that are not otherwise provided for under the statute. Further, ERISA limits who can bring an action to plan participants, beneficiaries, fiduciaries, and the Secretary of Labor. The proper defendant in a majority of actions is the plan itself, but those who mismanage funds, especially those owing fiduciary duties to the plan, can also be liable. Plan fiduciaries can include plan trustees, plan administrators, members of a plan’s investment committee, among others, who all owe core affirmative duties under ERISA: duty to act prudently, duty to diversify the plan’s assets, duty of loyalty, duty to pay only reasonable plan expenses, and duty to not engage in defined prohibited actions. ERISA litigation makes up a significant portion of federal court dockets, but numerous challenges obstruct a prospective ERISA plaintiff’s access to a federal court. This is but another reason for Congress to exempt this new student-loan matching contribution from ERISA’s “federal vacuum.”
Before filing an action under ERISA section 502 or 503 in federal court, a plaintiff usually must exhaust all of ERISA’s administrative remedies. ERISA benefit plans must provide internal dispute resolution procedures to plan participants. However, the statute only requires the plan to list the minimum information required, so a plan could include a complex grievance process, including mandatory arbitration and up to two levels of appeals. Therefore, a plaintiff’s action in court may be dismissed or decided based on a procedural failure to follow the plan’s internal processes, which are often complicated and burdensome on plaintiffs. ERISA itself does not impose an exhaustion requirement, but courts have strictly enforced such a requirement for ERISA lawsuits as an affirmative defense, limiting remedies for plan asset mismanagement to the plan’s own terms. Even for those with expertise in this area, the exhaustion requirement presents significant challenges. These challenges are even more pronounced for an average American who may not fully understand the complex statutory text that makes up ERISA. Further, the Supreme Court has ruled that the statute of limitations continues to run while a plaintiff is tangled up in the plan’s administrative process. This ruling creates a perverse incentive for plan administrators to complicate and drag out the process with hopes that plaintiffs will not exhaust the requirements in time or will simply give up altogether.
Finding a suitable attorney to undertake an ERISA case is another battle. First, the attorney must be competent and experienced in ERISA litigation for the claim to have a chance at success. Second, because federal courts have exclusive jurisdiction over most ERISA claims, a plaintiff must retain an attorney that is admitted to practice in federal court. Not all attorneys practicing state law are admitted to practice in federal court, further limiting the number of available advocates. Third, complex ERISA litigation can boast expensive rates, and contingent fees will assume some of the plaintiff’s recovery amount if successful. ERISA does provide an avenue for recovering attorney’s fees, but this is subject to numerous limitations: any work done during the administrative claims process warrants no attorney’s fees; if the claim is held to not fall under ERISA at trial, no attorney’s fees will be awarded; and if the plaintiff is considered a “losing” party, they can also be required to pay attorney’s fees, assuming the defendant has “some degree of success on the merits.” In all, finding a skilled, affordable ERISA attorney to pursue a plaintiff’s claim to recover benefits can prove to be challenging.
Other quirks in ERISA litigation can be problematic for plaintiffs. As previously noted, ERISA allows claimants to recover benefits that are due under the plan’s terms or to enforce their rights under the plan’s terms. Additionally, courts have frequently interpreted this language to exclude punitive damages and other state law damages, arguing that ERISA relief is equitable in nature. Accordingly, although the Federal Rules of Civil Procedure preserve a jury trial as declared by the Seventh Amendment for “any issue triable of right by a jury,” some federal courts have held that certain ERISA actions are not triable by jury. ERISA can also constrain discovery for causes relating to “wrongful” denial of benefits, limiting evidence to ERISA’s administrative record, which is ordinarily kept by the alleged wrongdoer. Even further, the “arbitrary and capricious” standard of review applicable to that administrative record may also bring claims to a halt, giving immediate deference to the company’s initial decision. These challenges can prevent plaintiffs from bringing—and ultimately winning—ERISA claims given a mismanagement of plan assets.
When ERISA is inapplicable, its rigorous requirements are relieved by more employee-friendly state laws. Currently, traditional scholarship programs and tuition and expense refund programs are not subject to ERISA if unfunded and paid for only by employers’ general assets. While the plan must satisfy the tax code’s requirements to become a qualified educational assistance program, it is not subject to ERISA’s exhaustion requirements, limited remedies, and onerous peculiarities. Here, the tax complexities are governed by the Internal Revenue Code, but employees who are not awarded what their employer promised under the program may bring state law actions against the employer for both compensatory and punitive damages. Claimants can choose from a variety of state law claims including breach of contract, tortious interference with a contract, negligence, fraud, and promissory estoppel, whereas ERISA preempts these state laws under an ERISA-governed plan. There is no persuasive reason why Congress cannot exempt this new benefit—“treatment of student loan payments as elective deferrals for purposes of matching contributions”—from the domain of ERISA to provide easier avenues for plaintiffs to recover benefits.
VI. Why State Regulation Is Important for This Hybrid Benefit
States have legitimate reasons to continue regulating tuition benefits. Citizens can more easily lobby for and change state laws, state governments can respond more quickly to their residents’ requests than their federal counterparts can, and public policy rooted in state laws can continue to assist plaintiffs in state actions. Lobbying at the state level is more practical for many who take issue with changing laws. Further, state representatives have a strong interest in protecting and advocating on behalf of their residents for election purposes and for overall satisfaction in state politics. Additionally, public policy has always had a strong resonance with state law, more so than federal law. All of these factors, not just the expansive language of ERISA itself, should be taken into consideration when deciding if ERISA preemption should take effect.
Indeed, the applicability of ERISA to this innovative hybrid benefit will undercut states’ abilities to serve as “laboratories of democracy.” States should be able to experiment with their existing statutes and common law causes of action, pushing forward laws that match state citizens’ attitudes and preferences regarding tuition benefits. Federal preemption is best utilized when states are incapable of uniform regulation or state laws are inadequate to address public concern. However, in this situation, states are more than capable of uniform regulation and adopting adequate laws to address public concern. ERISA has already sucked plenty of state laws into its federal vacuum, and Congress now has the opportunity to protect the state regulation of tuition and educational assistance benefits. ERISA’s purpose has always been to hold the plan responsible for mismanagement of assets and supply minimum requirements for effective plans. State law remedies can serve this purpose far better than ERISA’s limited federal remedies.
Conclusion: This Hybrid Benefit Should Escape ERISA’s Remedies
Congress should exempt “treatment of student-loan payments as elective deferrals for purposes of matching contributions” from ERISA’s domain so that state law remedies are available to employees who rely on this new benefit for retirement savings. Individuals who choose to utilize this benefit deserve a simpler way to recover unpaid or mismanaged plan assets than what the language of ERISA’s remedies provides. Allowing state regulation of tuition benefits is vital, especially with respect to this novel “hybrid” student-loan match benefit. Although the ERISA vacuum has a strong suction mechanism, Congress holds the power cord in its hand. Now is the time for Congress to unplug that vacuum.