Employer Student Loan Tax Benefit in the CARES Act

As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, payments made between March 27 and December 31, 2020, toward employee’s student loan debt may be eligible for a tax benefit. Employees can exclude up to $5,250 from their gross income, so long as the payments are for the retirement of student debt. This section (Section 2206) of the CARES Act amends IRC Section 127 (IRC 127) by adding a special rule in the form of Section 127(c) (1) (B).

Prior to CARES, IRC 127 allowed for tuition paid for an employee’s current education (up to $5,250) to be excluded from gross income.  Under IRC 127, because the benefit is not income to the employee, the employer is not paying payroll taxes while assisting their employees in paying off their debt. The CARES Act provides a temporary window through the end of 2020 to apply the tax benefit for prior education student loan principal and interest. Payments may be made to employees or directly to the employee’s lender.

Employer Student Loan Tax Benefit in the CARES Act

Employees with student loans have been able to claim a deduction for interest paid up to $2,500. The CARES Act prevents employees from claiming this deduction and the $5,250 exclusion from their gross income. In a sense, they cannot “double dip”.

Employers who offer an educational assistance program as prescribed through IRC 127 must have the following elements:

  • Be set forth in writing
  • Not be discriminatory in terms of eligibility
  • Adhere to restrictions on the eligibility of principals who own at least 5% of the company
  • Not be offered as a replacement to other remuneration (i.e. allocation of salary), and
  • Be communicated to employees sufficiently

Why Add the Student Loan Benefit Now?

Many Americans struggle with student debt and this entices employers to create an educational assistance program or revise an existing program to include student loan repayments. It is a benefit that can set companies apart from competitors. This benefit would be especially valuable to employers who are highly competitive in hiring recent college graduates. Surveys from 2019, including a Society of Human Resources Institute survey, indicate that less than 10% of employers are offering the student loan repayment benefit.

What Next?

There is some thought that this temporary exclusion from gross income may become permanent. It would make sense, the IRS provides the benefit for students to stay out of (or reduce) debt through excluding tuition reimbursement from gross income, it seems it could do the same in allowing employees to get out of debt quicker.

It is not difficult to set up and administer an educational assistance program and right now they can provide employees and employers with a substantial tax-free benefit. The one challenge to the benefit is that is one that is not available for all employees to enjoy, as opposed to health insurance, short-term disability, etc. However, offering this as a benefit could prove valuable to employers in attracting talented employees.

To learn more about the student loan tax benefit and how it affects employers, please contact Brad Smith in the form below.

Published June 29, 2020

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401(k) Student Loan Benefits Still Around the Corner for Most

You would have to be hiding under a rock not to have heard that student loan debt in the United States is a runaway train. Millennials reportedly rank student loan assistance as an employee benefit that would not only attract them to one employer over another, but would keep them there. Employers are looking to their advisors to come up with affordable programs to meet the needs of their current and prospective millennial employees. The Internal Revenue Service (IRS) recently gave employers and their advisors hope that attractive, affordable student loan debt assistance programs are just around the corner.

On August 17, 2018, the IRS published a private letter ruling (PLR) that it had issued in May to the sponsor of a defined contribution plan, reported to be Abbott Laboratories (Abbott). As described in the PLR, Abbott sponsors a defined contribution 401(k) plan that provides that if participants make elective contributions equal to at least 2 percent of their eligible compensation, Abbott makes a matching contribution equal to 5 percent of their eligible compensation.

Abbott proposed to amend the plan to provide an employer nonelective contribution on behalf of any employee who volunteers to participate in the plan and who makes student loan repayments for the pay period that are equal to at least 2 percent of eligible compensation, regardless of whether the employee makes elective contributions. Abbott proposed to make a contribution after the end of the plan year equal to 5 percent of the employee’s eligible compensation for that pay period. If, on the other hand, an employee did not make student loan repayments in the required amount, but made elective contributions equal to 2 percent of their eligible compensation, then Abbott would make a matching contribution after the end of the plan year equal to 5 percent of the employee’s eligible compensation.

To be eligible for either of the contributions, the employee must be employed on the last day of the plan year. Abbott confirmed that all employer contributions would be subject to the same vesting schedule as regular matching contributions under the plan, as well as to all qualification requirements regarding eligibility, vesting, distribution, contribution limit, and nondiscrimination testing.

The IRS approved the proposed amendment, and Abbott announced the program in June 2018. Abbott’s press release about the program and the subsequent publication of the PLR has launched numerous articles proclaiming there is now an answer for employers’ searches to assist their millennial employees with their student loan debt burden. Employers, however, should be cautious.

This PLR, and every other private letter ruling, contains the caution that the letter is directed only to the taxpayer requesting it, and that, by law, it cannot be relied on or cited as precedent by any other taxpayer. In any event, the PLR did not specifically address two circumstances in which many plan sponsors find themselves—adopting preapproved plans and/or sponsoring safe harbor plans.

Plan sponsors will want to keep their eyes open for any generally applicable guidance from the IRS regarding student loan debt programs. Let your trusted advisors know to keep such guidance on their radar for you. For now, there is reason to hope, but no reason to amend your plan, based on this PLR.

Questions? Contact your Findley consultant or Sheila Ninneman, JD at Sheila.Ninneman@findley.com, or 216-875-1927.

Posted September 27, 2018

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