An expansion of student loan benefits in the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides an allowance for employers to help employees make student loan payments that are tax-deductible to the employer and tax-free to the employee. Taxpayers with the ability to manage their compensation packages might want to consider adding this benefit offering to employees.
Expanding education assistance programs during this time of uncertainty could increase long-term employee loyalty and attract new talent as businesses adjust to ongoing changes.
An overview of the new expansions follows, as well as important information for employers to keep in mind regarding providing student loan payments.
Section 2206 of the CARES Act revised Section 127 of the Internal Revenue Code (IRC), which generally allows up to $5,250 of payments made by an employer toward educational expenses to be tax-free to the employee.
With the expansion of IRC 127, employers can now also make payments toward or subsidize the employee’s qualified education loan, including principal and interest. The annual limit, however, remains at $5,250 and is applicable for any qualifying loan payments made between the enactment of the CARES Act on March 27, 2020, and December 31, 2020.
The expansion of IRC 127 allowing for qualifying student loan payments already provides employees with educational assistance including tuition reimbursement programs. It’s important to note that coordination might be necessary with existing tuition reimbursement.
While the CARES Act expanded definition of educational assistance, all of the existing rules related to IRC 127 remain and must be followed.
For an employer to make the payment tax-deductible, several requirements must be met including the following:
- The employer must provide a written plan document detailing the program and how to access the funds.
- Educational assistance programs, including qualifying loan payments, aren’t considered taxable income to employees.
- The student loan must be the employee’s loan, not the loan of a spouse or child.
- The educational assistance program or qualifying loan program must be offered on a nondiscriminatory basis to all employees.
- The program can’t provide or offer employees a choice between educational assistance or wages.
It’s important to note that the $5,250 payment limit applies to any potential combination of benefits, such as employee student loans and employee education programs.
For example, an employer could decide to pay $3,000 toward an employee’s Master’s degree and another $4,000 of the same employee’s undergraduate student loan payments. Despite the amounts going toward separate expenses, the maximum amount that could be given to the employee tax-free would still be $5,250.
To the extent an employee’s student loan is paid on a tax-free basis under the expanded Section 127 by their employer, the employee can’t deduct the interest on the student loan under Section 221.
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To learn more about employer-provided student loan payments and how they could help your employees, contact your Moss Adams professional.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: