• FREE RESOURCES
  • PREMIUM CONTENT
        • SEE MORE
          PREMIUM RESOURCES
  • HR DEEP DIVES
        • Coronavirus (COVID-19) Resources for HR Professionals
          Employment Law
          Labor Law Posting Requirements: Everything You Need to Know
          Recruiting
          businesswoman selecting future employees on digital interfaces
          Recruiting Resources for HR & Hiring Managers
          Performance Management
          vector image of young female making star rating
          Performance Review Resources
          Employment Law
          Understanding Equal Employment Opportunity and the EEOC
          Recruiting
          Onboarding Resources for HR & Hiring Managers
  • CORONAVIRUS & HR

  • LOGIN
  • SIGN UP FREE

HR Morning

  • FREE RESOURCES
  • PREMIUM CONTENT
        • SEE MORE
          PREMIUM RESOURCES
  • HR DEEP DIVES
        • Coronavirus (COVID-19) Resources for HR Professionals
          Employment Law
          Labor Law Posting Requirements: Everything You Need to Know
          Recruiting
          businesswoman selecting future employees on digital interfaces
          Recruiting Resources for HR & Hiring Managers
          Performance Management
          vector image of young female making star rating
          Performance Review Resources
          Employment Law
          Understanding Equal Employment Opportunity and the EEOC
          Recruiting
          Onboarding Resources for HR & Hiring Managers
  • CORONAVIRUS & HR
  • Employment Law
  • Benefits
  • Recruiting
  • Talent Management
  • Performance Management
  • HR Technology
  • More
    • Leadership & Strategy
    • Compensation
    • Staff Administration
    • Policy & Procedures
    • Wellness
    • Staff Departure
    • Employee Services
    • Work Location
    • HR Career & Self-Care
    • Health Care
    • Retirement Plans

An innovative approach that leads to long-term retention

COBRA notice
Jared Bilski
by Jared Bilski
November 20, 2015
2 minute read
  • SHARE ON

To stand out from the competition and attract and retain top talent for the long-term, some employers rely on some very creative compensation tactics.  
One of those tactics is a forgivable loan. Under this type of arrangement, employers offer an employee a loan that will be forgiven if that worker is able to meet certain terms. Generally, at least one of those terms is that the employee stays at the company for a certain length of time. But employers can also work performance standards into the terms of the loan as well.
Here’s an example of how this type of structure works, courtesy of The Emplawyerologist: Say an employer offers one employee a $50,000 forgivable loan because it wants to retain that worker for at least five years.
Under the terms, every year that employee stays with the company $10,000 of the loan is forgiven until the five years are up and the loan is completely forgiven. So if the employee leaves after one year, she is only on the hook for $40,000 of the $50K loan (plus interest). The $50,000 is offered up front as a tax-deferred lump sum and the employee can use it in any way she sees fit.

Tax implications

Forgivable loans do include certain tax implications employers need to be aware of. According to the IRS, the loan amount doesn’t count as compensation as long as it represents a true debt agreement between the employer and the employee with the proper corresponding documentation.
This documentation should include:

  • A promissory note or some type of a legally binding agreement between the employer and the employee receiving the loan
  • a forgiveness/repayment schedule, and
  • clear terms for the forgiveness, repayment, default and interest (based on market rates) of the loan.

This documentation should never include any wording that refers to the loan as a bonus, award or compensation or the loan could become taxable compensation by the IRS.
The loan amount, however, is taxable as income to the employee over the life of the loan, e.g., as the loan is repaid or forgiven over time.
In other words, in the $50,000 loan example above, only $10,000 will be taxable as income each year for the life of the loan.

Get the latest from HRMorning in your inbox PLUS immediately access 10 FREE HR guides.

I WANT MY FREE GUIDES

Keep Up To Date with the Latest HR News

With HRMorning arriving in your inbox, you will never miss critical stories on labor laws, benefits, retention and onboarding strategies.

Sign up for a free HRMorning membership and get our newsletter!
  • This field is for validation purposes and should be left unchanged.
HR Morning Logo
  • Facebook
  • Twitter
  • Linked In
  • ABOUT HRMORNING
  • ADVERTISE WITH US
  • WRITE FOR US
  • CONTACT
  • Employment Law
  • Benefits
  • Recruiting
  • Talent Management
  • HR Technology
  • Performance Management
  • Leadership & Strategy
  • Compensation & Payroll
  • Policy & Culture
  • Staff Administration
  • Wellness & Safety
  • Staff Departure
  • Employee Services
  • Work Location
  • HR Career & Self-Care

HRMorning, part of the SuccessFuel Network, provides the latest HR and employment law news for HR professionals in the trenches of small-to-medium-sized businesses. Rather than simply regurgitating the day’s headlines, HRMorning delivers actionable insights, helping HR execs understand what HR trends mean to their business.

Privacy Policy Terms of Service
Copyright © 2021 SuccessFuel

WELCOME BACK!

Enter your username and password below to log in

Forget Your Username or Password?

Reset Password

Lost your password? Please enter your username or email address. You will receive a link to create a new password via email.

Log In

During your free trial, you can cancel at any time with a single click on your “Account” page.  It’s that easy.

Why do we need your credit card for a free trial?

We ask for your credit card to allow your subscription to continue should you decide to keep your membership beyond the free trial period.  This prevents any interruption of content access.

Your card will not be charged at any point during your 21 day free trial
and you may cancel at any time during your free trial.

preloader