Update: CAA of 2021 extended these provisions through 2025.
For the past few years, employers have been grappling with different ways to provide student loan assistance to employees. Before January 1, 2021, employers can make contributions toward their employees’ student loans on a tax-free basis under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was enacted on March 27, 2020 with the goal of offering relief to employees and employers. Part of the CARES Act amends the rules of Internal Revenue Code (IRC) Section 127 to allow employers to pay eligible employees’ student loans as educational assistance.
Below are eight questions to provide employers guidance on the expansion of educational assistance programs to include student loan benefits.
What must an employer do to take advantage of the new rule?
An employer needs to establish an educational assistance program if it does not already have one.
There are several requirements that must be met to qualify as an educational assistance program under IRC Section 127:
- The program must be a separate written plan for the exclusive benefit of employees to provide employees with educational assistance.
- Employees must be given reasonable notification of the program.
- The program must not discriminate in favor of highly compensated employees.
- Employees cannot be given the choice between receiving cash or other taxable wages/benefits and educational assistance.
- No more than 5% of the amounts paid by the employer under the program may be provided to 5% owners, their spouses or dependents.
If an employer already has an existing educational assistance program in place, it must be amended to add student loan payments as a benefit under the program.
Must an employer expand its educational assistance plan to include student loan benefits?
No. Participation by an employer is optional, and the program can be eliminated at any time.
Is there a dollar limit on the amount of student loans an employer can pay?
Yes. There is an annual limit of $5,250 per employee.
Do all student loan payments qualify for favorable tax treatment?
No. To qualify:
- The loan must have been incurred by the employee for the employee’s education. Loans taken out by an employee’s parent do not qualify, nor do loans taken out by an employee for his/her child.
- Payments can be made on private or federal loans.
- Loan payments must represent principal or interest on a “qualified educational loan.”
What is a “qualified educational loan?”
It is a loan taken out solely to pay qualified higher education expenses, including tuition, fees, room and board, books, supplies, equipment and other necessary expenses.
Is there a time limit for making payments?
Yes. Payments must be made by the employer on or after the date the CARES Act was enacted (March 27, 2020) and before January 1, 2021. The student loan expansion provision expires unless extended by a new law. Bills that would allow tax-free employer payments on student loans have been introduced in Congress for the past several years but have not been enacted. If this provision of the CARES Act expires as scheduled, then employer payments on or after January 1, 2021 would be taxable compensation once again (as prior to March 27, 2020).
How does an employer go about making student loan payments?
An employer can make payments directly to the lender, or it can reimburse the employee for payments already made by the employee.
How many employers are expanding their educational assistance programs to include student loan benefits?
The April 2020 International Foundation survey report Employee Benefits in a COVID-19 World finds that of the organizations polled, 25% offer Section 127 programs. Of those, 10% of organizations are taking advantage of the student loan provision, but an additional 13% are considering it.
Learn More About Coronavirus and the Workplace
Visit the International Foundation Coronavirus (COVID-19) Resources page to find information for plan sponsors, including these upcoming free member webcasts:
- Integrating Impact Investing With the Pension Investment Process | June 10, 2020
- Apprenticeship Program Challenges During COVID-19 |June 11, 2020
- Risk Assessments in Public Sector Pension Plans | June 16, 2020
Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation
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