Over the past several years, we have seen more and more employers wishing to provide a student loan benefit to their employees as an employee attraction and retention tool. These programs take many forms and student loan repayment vendors can ease the process for employees (and employers making contributions on their behalf), by facilitating the payroll deduction process and making those payments directly to the loan institution. So, in a time when many employers are looking to save money on benefit costs, why are these programs getting attention in the past several weeks?
Student loan repayment is most commonly a taxable benefit to employees. However, a provision contained in the CARES Act passed in late March provides employers a way to make student loan payments on a tax-free basis through December 31, 2020. Employers may make payments toward an employee’s student debt of up to $5,250 on a tax-free basis if done through a Section 127 plan.
Employers who already have an educational assistance program under Internal Revenue Code Section 127 for reimbursement of tuition expenses will have an easier time extending this benefit to employees. This is because the change in the CARES Act allows employers with these plans to simply make an amendment to their current plans to extend the benefit to include payment of principal and interest on “qualified education loans.” Employers who do not currently have educational assistance programs in place will need to engage qualified legal counsel to draft a plan document to put a program in place. But, it is important to note that the $5,250 limit referenced above includes all benefits received under the plan (tuition reimbursement and student loan repayment for plans that allow both).
We are often asked whether employees can choose between student loan repayment and other benefits. The general answer to this question is “no.” Student loan repayment, whether offered as part of a Section 127 Educational Assistance Program or not, is not a qualified benefit under the Section 125 cafeteria plan rules. However, as a matter of budgeting, employers may reallocate a portion of their current benefits expenses from one expense to another. For example, employers may choose to reduce their overall HSA contribution from $1000 per employee to $500 per employee and reallocate that amount to a student loan repayment program.
For employers who already have Section 127 plans and those intending to offer this benefit in 2020, this may be welcome news. For other employers, timing may not be right to jump in. Many are hopeful this tax relief will extend beyond 2020, but only time will tell.
Please contact your HORAN representative with additional questions.