Under the CARES (Coronavirus Aid, Relief, and Economic Security) law, employers can now make tax-free payments of up to $ 5,250 to employees as assistance in the repayment of student loans, but only if the payments are made before December 31, 2020, as part of a study aid. program that meets the requirements of Internal Revenue Code (Code) Section 127. By using such a program, employers and employees will avoid federal payroll taxes on eligible payments, and employees will save on federal income taxes that would otherwise apply.
Until recently, there was no apparent way for an employer to provide student loan repayment assistance on a tax-free basis. Therefore, despite the well-documented negative impact of rising student debt, student loan repayment assistance has remained a relatively unattractive benefit. As we discussed in a previous article, this changed somewhat in 2018 when the Internal Revenue Service issued a private letter decision allow an employer’s program to match student loan repayments with contributions to the employer’s pension plan. Such a matching program helps employees who are struggling to save adequately for retirement while paying off student debt, but it does not provide direct assistance in paying off student loans. Now, with the passage of the CARES Act, employers can temporarily make direct, tax-free payments to employees or lenders to help employees repay their student loans.
To take advantage of this advantage, employers who already maintain an educational assistance program will have to modify their program and employers who do not already maintain such a program will have to adopt one. The following provides an overview of some of the main requirements of an educational assistance program that provides student loan repayment assistance:
- Written plan – The program should be spelled out in a written plan document. There are no specific requirements as to the form of the written plan document, but the document must describe in detail the eligibility, benefits and operating rules and must be formally adopted by the employer.
- Note – Employers must provide reasonable notice of the availability and terms of the program to eligible employees. Often the program or plan document is prepared to also serve as a notice that can be distributed to employees.
- Eligibility – With the exception of certain owners, all employees may be eligible to participate in the program. Employers, however, can limit eligibility in various ways (for example, employees with a certain title or employees in a certain location), but no eligibility restriction should discriminate in favor of highly paid employees. Problems of discrimination can be avoided by making all employees eligible or excluding all highly paid employees.
- Benefits – An employer can provide up to $ 5,250 in educational assistance to an employee each year under the program. Historically, such assistance has been limited to reimbursing employee expenses, paying expenses on their behalf, or exempting expenses (if the employer is an educational institution) incurred by the employee for their studies. during his employment. However, under the CARES Act, in effect for payments made by employers from March 27, 2020 to December 31, 2020, educational assistance includes payments of principal or interest on an “eligible student loan”. , as defined in Article 221 (d) of the Code. (1), engaged for the education of the employee. Payments may be made directly to lenders or as reimbursements to employees and are combined with any other payments under the program for the purposes of applying the maximum of $ 5,250.
- For this purpose, a “qualifying education loan” is a debt incurred by the employee solely to pay for qualifying higher education expenses incurred by the employee at approximately the same time and at a time when the employee was an employee. eligible student. See IRS publication 970 for more details.
- Justification – Employers should require that employees receiving benefits under the program justify their expenses.
- No money instead of benefits – Employers cannot offer employees benefits under the program in lieu of cash payment. In other words, employees cannot “opt in” or “opt out” of benefits.
- Recovery provision – The program may require an employee who receives benefits under the program and fails to meet a subsequent condition, such as remaining employed for one year, to repay the benefits. Such a provision, however, is not always enforceable under state law and may be difficult to apply in practice.