Through 2025, businesses have the opportunity to help employees pay off up to $5,250 in student loans each year ($21,000 total), through adoption of a simple written reimbursement program. If structured properly, the assistance is deductible by the employer and excluded from employees’ taxable income.
This is thanks to one of the lesser known provisions of the CARES Act of 2020, which expended the use of the existing Internal Revenue Code Section 127 for tuition reimbursement programs, to permit repayments of principal or interest on an eligible employee’s “qualified education loan,” as defined under 26 U.S.C. 221(d). This generally refers to debt incurred for eduction leading “to a degree, certificate, or other education credential” from an “eligible educational institution,” which is widely defined to include any accredited public, non-profit or privately owned for-profit college, university, trade school, or other post-secondary educational institution. The CARES Act provision was meant to expire in 2021 but was extended, through December 31, 2025, under the Consolidated Appropriations Act, 2021. As mentioned, the annual limit on tuition assistance, and by extension on student loan repayment assistance, is $5,250, but if a reimbursement plan is put into place in 2022 and used each year to the maximum limit, a participating employee can chop up to $21,000 off of existing student debt.
For employers looking to put a student loan reimbursement plan in place, or amend an existing tuition reimbursement plan to add a student loan feature, there are a few rules to keep in mind.
- The $5,250 annual limit applies to both student loan repayments, and tuition reimbursement. Therefore, an employee who is paying off qualified education loans while incurring new tuition expenses would have to allocate the $5,250 annual budget between the two expense categories. No double dipping.
- You need a written plan document. This is a requirement of Section 127. It needs to spell out who is eligible to receive benefits (note that nondiscrimination rules apply), whether tuition reimbursement or student loan repayments, or both, are offered, the annual dollar limit (whether $5,250, or a lower amount), and any applicable limitations on benefits. In this regard, some plans require repayment of benefits if employees leave employment within one year after receiving tuition or loan repayment assistance.
- The assistance must be fully employer-funded and may not be offered as an alternative to employees’ existing or additional cash compensation.
- You must substantiate proper use of the funds for permitted tuition or student loan repayments. Substantiation is required whether employers pay student loans directly to vendors (or pay educators directly for tuition) or reimburse employees for payments they incur.
Making your company stand out with a valuable benefit offering may help it attract and retain employees in today’s tight job market. For more information on student loan reimbursement plans, visit our prior post on this topic. And if you need help adding or amending a reimbursement program for 2022 to permit student loan repayments, use EforERISA’s contact form or reach out at email@example.com.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.
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