In these troubled times, not all employers are eliminating benefits and reducing staff – essential businesses such as healthcare providers, grocery and pharmacy chains, high-tech and certain nonprofit organizations such as food banks, are actually adding staff (with Amazon and Walmart being obvious examples).
Those essential businesses that are adding to payroll or are asking extraordinary efforts from their existing employees should consider making tax-advantaged payments towards employees’ student loans through a new CARES Act measure made available from March 27, 2020 (the CARES Act adoption date), through the end of this calendar year. The CARES Act provision is not in any way limited to essential employers, but by necessity these may be the only employers who are in a financial and staffing position to give the measure serious consideration at this time.
The measure is an add-on to existing Section 127 of the Internal Revenue Code which currently allows employers to provide eligible employees with tax-free educational assistance of up $5,250 per year provided certain conditions are met. Section 127 plans are sometimes referred to as qualified educational assistance programs or EAPs. Permitted types of educational assistance include tuition, fees, and books, for a broad range of educational pursuits, including graduate degrees, which need not be directly job-related. Employers can pay the amounts directly to educators or can reimburse employees after the fact.
Under Section 2206 of the CARES Act, the annual maximum benefit remains the same, but “educational assistance” is expanded to include direct payment or reimbursement of principal and interest payments to a provider of any qualified education loan as defined under 26 U.S.C. 221(d). Notably, the CARES Act does not change the maximum annual budget. In other words, employers could “spend” the $5,250 per year for a single employee three different ways:
- by using the entire budget for tuition;
- by using the entire budget for student loan payments; or
- by making a combination of tuition payments and student loan payments, with the total not exceeding $5,250.
There are some other requirements to offer this benefit. There must be a written plan document that sets forth the following information:
- the group of employees eligible to receive benefits, which must not discriminate in favor of highly compensated employees, defined as those owning more than 5% of the employer company, or earning in excess of $125,000 in 2019;
- the types of benefits offered, e.g., tuition assistance, student loan repayments, or either/both, subject to the dollar limit;
- the annual dollar limit (currently $5,250 is the maximum amount but an employer can choose a lower amount); and
- any applicable limitations on benefits, such as the requirement to pay benefits back in the event the employee leaves employment within one year after receiving the tuition or loan repayment assistance. Some tuition assistance programs may also impose a requirement that a certain grade level be attained.
- benefits must be 100% employer-funded, and not in any way offered as an alternative to employees’ existing or additional cash compensation; and
- there must be substantiation of use of the tax-qualified dollars for permitted tuition or student loan repayments. This may be automatic where the employer makes direct payments to educators or student loan vendors, but additional steps are needed if these amounts are reimbursed after employees incur them directly.
The CARES Act is drafted in a way that suggests an employer must have an EAP in place, to which this new feature is added, but employers should be able to adopt an EAP this year, and either limit it to student loan repayments, or make it a traditional educational assistance program with student loan repayments one of the forms of educational assistance, alongside qualifying types of tuition, fees, etc.
Although this measure is meant to sunset at the end of this year, if there is meaningful uptake by essential employers there is a greater chance that it could be extended, perhaps indefinitely. Especially if the annual dollar limit is adjusted upwards to track inflation (or, better yet, the more rapidly increasing inflation in education costs), tax-advantaged student loan repayments could remain a useful means of attracting and retaining qualified employees both during and after the COVID-19 pandemic.
The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader. Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose. © 2020 Christine P. Roberts, all rights reserved.
Photo Credit: Andre Hunter, Unsplash.