When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in March of 2020 allowing employers to make contributions of up to $5,250 toward their employees’ student loans on a tax-free basis, employers and employees alike were grateful for the tax benefits. This was not expected to be a permanent solution to the student debt crisis, as the provision was set to expire on December 31, 2020.
But on December 27, 2020, then-President Trump signed the Consolidated Appropriations Act of 2021 (CAA) into law, which extended the student loan payment assistance provisions in the CARES Act to allow employer-provided student loan repayment as a tax-free benefit to employees for five additional years.
For additional background on the CARES Act provisions and Q&As to assist employers with the expansion of educational assistance programs to include student loan benefits, see our previous blog: CARES Act Expands Student Loan Benefits for 2020.
Tax Benefits for Employers and Employees
The CAA amended Section 127 of the Internal Revenue Code to expand the definition of “educational assistance” to include student loan repayment assistance.
- Through December 31, 2025, employers can choose to make tax-free annual contributions of up to $5,250 per employee toward eligible education debt.
- Neither the employer nor the employee will have tax liability for the money applied to student loan payments.
- Employers will receive an income tax deduction for payments made toward employees’ eligible education debt.
- If employers choose to adjust employees gross pay by $5,250 for educational assistance in 2021, this will amount to a 7.65% payroll tax savings for both the employer and employee.
Are employers expanding their educational assistance programs to include student loan benefits?
We don’t know yet how organizations are responding to the extended student loan payment assistance provisions. However, the International Foundation Employee Benefits Survey: 2020 Results report finds that of the organizations polled, 5.6% offer student loan repayment programs.
Has any Congressional action been taken related to student loan assistance?
There have been several bills introduced in the 117th Congress related to employers and student loan educational assistance.
- HR 902, the Debt Act of 2021, was introduced in February 2021. The bill expands the tax exclusion for employer-provided educational assistance programs to include an employer’s payment of any qualified education loan incurred by an employee and increases the maximum amount that may be excluded from the gross income of an employee under employer-sponsored educational assistance programs from $5,250 to $10,000.
- A pair of bills (HR 2917 and S 1443) introduced in April 2021 make up the Retirement Parity for Student Loans Act. These bills allow certain employer-sponsored retirement plans to make matching contributions for an employee’s student loan payments as though the loan payments were salary reduction contributions to the retirement plan.
It is unclear if these bills will gain momentum so we will have to wait and see. Currently, Congress is focused on student loan bankruptcy reform.
What does the future hold?
Student loan repayment assistance benefits could be just what employers need to give them an advantage in employee hiring and retention following the challenges brought on by the COVID-19 pandemic.
For the next few years, employers have some certainty about the tax-favorability and dollar maximum under Section 127 plans for student loan repayment assistance. There is speculation that the provisions will be extended beyond 2025, possibly becoming permanent.
Stay tuned to the International Foundation for updates on student loan assistance and other educational assistance plans.
Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation
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