Student loan assistance is one of the less-discussed changes included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. But the act gives employers a great way to reward some of your workers with tax-free help paying down their student loan debt.
Don’t wait to check out the new IRS rules on student loan assistance, especially if you haven’t already set up an Education Assistance Plan (EAP).
That’s the first step.
And even if you are already offering an EAP, the plan will need to be specifically amended to comply with the new rules.
Adding or expanding existing plans to include the new program is entirely optional for employers.
But, once you create a qualifying plan, you can pay up to $5,250 towards employees’ loans this year and they will not face a tax bill for the added compensation.
Tax-free student loan assistance requirements
To qualify under the new IRS rules (IRC Section 127), an EAP must specifically include student loan payments as a benefit.
Payments must start on or after the date of the Act, March 27, 2020 and expires on January 1, 2021, unless Congress extends the entire CARE Act or the student loan tax abatement or makes the rule permanent.
Payments can only go towards a qualified private or federal loan taken out by the employee for their own education expenses.
The current rules exclude both educational loans taken out by an employee’s parent or a loan an employee took out to pay for their child’s college.
For qualifying loans, you can either arrange to pay directly to the lender or you can reimburse the employee for payments they make. Check the paperwork requirements carefully to make sure you don’t inadvertently create an unexpected tax exposure.
Other requirements:
- The program must be a separate written plan for the exclusive benefit of employees to provide employees with educational assistance.
- Employees must be given reasonable notification of the program.
- The program must not discriminate in favor of highly compensated employees.
- Employees cannot choose to receive cash or other taxable compensation in lieu of educational loan payments.
- Owners (holding 5% or more of company equity) cannot receive more than 5% of the total amounts paid out in educational support benefits. That includes 5% owners themselves, their spouses, children, or other dependents.
Only about 25% of employers are taking advantage of Section 127 EAPs to attract and retain employees, according to a recent survey, and even fewer yet offer the loan repayment benefit.
That makes it a great time to investigate whether adding tax-free student loan payment assistance can help you compete for top talent during and after the COVID-19 crisis.
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