One in eight individuals in the US carries student loan debt. This burden can feel overwhelming, as is often the case for care workers whose wages have not grown at the same rate as those for whom they work. Luckily there is a relatively new program offering relief.
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The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act included a provision expanding coverage for education assistance under Section 127 of the IRS code. The CARES Act allows employers to repay up to $5,250 per year of student loans on behalf of an employee, and they can do so without reporting the payment as income to the employee. Maximizing this benefit can save the employer and employee more than $400 each by exempting the compensation from FICA taxes totaling 15.3%. Further, the amount paid by the employer is not reported as income on the employee’s W2, and is not subject to income tax. Consolidated Appropriations Act of 2020 extended it through December 31st, 2025, so start planning now to take advantage of this benefit before it expires.
What loans qualify for repayment?
Loans taken to pay for qualified education expenses (tuition, room & board, books and expenses) for you, your spouse, or a dependent generally qualify. However, loans from related persons or from employer programs do not qualify.
What is required to set up employer student loan repayment?
To pay an employee’s student loans on a pre-tax basis, an employer must establish a qualifying Education Assistance Program (EAP). EAP requirements include:
- A written plan in place outlining the terms and conditions. The IRS does not provide details of the language required, but templates can be found online through a search engine.
- No choice is given to employees between educational assistance benefits and other taxable compensation. Employees use the benefit or lose it. As such, employers should carefully evaluate the need for offering such a plan as part of an employee’s total compensation package each year.
- Reasonable notice of the program is provided to eligible employees.
- Plan benefits must be available on substantially the same basis to each member of a group of employees and must not favor highly compensated employees.
Employers are not required to complete any additional tax filing for their EAP, but they should retain documentation.
How does an employer make a payment on behalf of an employee?
While the IRS has not provided specific guidance on how to make these payments, it is best for employers to send payments directly to the lender or loan servicer. Payments should be made for credit to the employee’s account and may be applied to principal, interest, or other fees accrued on the loan. Employers should retain documentation of the employee’s loan (such as a statement) as well as the payments made.
What if an employer repays more than $5,250 of an employee’s student loan?
Any payments in excess of $5,250 are taxable as income to the employee and subject to employment taxes (FICA and Unemployment). So if an employer repays $6,000 of an employee’s student loan, $5,250 is tax free and $750 is taxable.
Must an employer offer an equal benefit to each employee?
Like all education assistance programs, student loan repayment must be available on substantially the same basis to each member of a group of employees. The group must be defined under a reasonable classification set up by the employer such as full-time or part-time workers.
Are there any minimum qualifications with regard to length of service?
An employer’s Education Assistance Program can include a length of service requirement prior to eligibility. A plan can also include a “claw-back” provision wherein an employee must satisfy some condition such as completing one year of service, or repay the benefit. However, such a provision is not always enforceable under state law, can be difficult to enforce, and may be off-putting to your employee. Instead, we recommend thinking of student loan repayment as a non-taxable bonus provided to an employee, with no strings attached.
Student Loan Repayment and taxation may sound complicated, but the team of experts at HomeWork Solutions is here to help you craft the compensation plan that is right for you. Check out our Knowledge Center or give us a call at 800.626.4829 for a free consultation. When you are ready to hire, be sure to enroll in our Complete Payroll service so you won’t have to lift a finger!