Consolidated Appropriations Act, 2021

December 16, 2021December 17, 2021

In A Competitive Job Market, Helping With Student Loan Payments May Give Your Business the Edge

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 croberts@mullenlaw.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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April 29, 2021April 29, 2021

IRS FAQs Address COVID-19 Partial Plan Termination Issues

On April 27, 2021 the IRS supplemented its online FAQs on COVID-19 relief for retirement plans and IRAs with information related to relief from partial plan terminations. Under Division 33, Section 209 of the Consolidated Appropriations Act of 2021 (CAA), a plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020. For employers with a calendar year, this buys them three months of additional time to recover and add back participants, as usually a partial termination would have been determined based on participant levels as of their plan year end on December 31, 2020. We reviewed the partial termination relief provisions of the CAA in this earlier post.

The new FAQs clarify the following issues:

Definition of Active Participants Covered by the Plan For purposes of the 80% retention rule, the FAQ advises that plan sponsors use a “reasonable, good-faith interpretation,” of the term “active participant covered by the plan,” applied in a consistent manner, when determining the number of participants covered by the plan on the March starting and ending dates. In 401(k) plans, participants who meet the eligibility requirements to make salary deferrals generally have been required to be counted as active participants covered by the plan (See Q&A 40), even if they do not actively defer. The FAQ does not address the distinction between “eligible” versus actively deferring. Plan sponsors with questions about counting active participants should consult benefit counsel or other benefit advisors.
Application of March to March Period to Calendar Plan Year The FAQ clarifies that if any part of the plan year falls within the March 13, 2020 to March 31, 2021 period, then the relief applies to any partial termination determination for that entire plan year. For a plan with a calendar plan year, the relief therefore applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year, because both years include a portion of the March 13, 2020 to March 31, 2021 determination period.
Impact of New Hires on 80% Test The FAQs make clear that the 80% test looks at the total population of active participants and not only at the pool of active participants who were covered on March 13, 2020. In other words, new hires that met eligibility under the plan by March 31, 2021 may be counted, and plan sponsors do not need to take a snapshot of active participants as of March 13, 2020 and ensure that 80% of those exact people were still employed on March 31, 2021, in order for the relief to apply. This is an expansion of normal rules for partial terminations, which would ordinarily require that a participant who is terminated be individually rehired in order not to count as having been affected by the partial termination.
Relief Not Limited to COVID-Related Staff Reduction The FAQs make clear that although March 13, 2020 happens to be the date that the COVID-19 national emergency was declared, the relief applies regardless of the reason for the reductions in active plan participants; the reductions need not be related to the COVID-19 pandemic.

Plan sponsors should take heed of the CAA partial termination relief and make use of it when possible. Form 5500 Return/Reports require plan sponsors to report the number of active participants at the beginning, and end, of each plan year, which permits IRS to IRS FAQs Address COVID-19 Partial Plan Termination Issues possible partial plan terminations. Armed with this data, IRS earlier this year announced a compliance check program focused on partial terminations. This is a form of soft audit that could lead to a more formal audit program in the future.

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. © 2021 Christine P. Roberts, all rights reserved.

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January 29, 2021

In Rehire Mode? Keep March 31, 2021 in Mind for Your 401(k) Plan

If your business is one of the many that reduced employees in the early days of the COVID-19 pandemic, you need to keep March 31, 2021 marked on your calendar, particularly if you are fortunate enough to be ramping up activity and adding workers back to your payroll.

As explained in our earlier post, when employer action, including as the result of an economic downturn, results in 20% or more of the population of an employee retirement plan being terminated from employment, a presumption arises that a “partial plan termination” has occurred, with the result that everyone affected by the partial termination must be fully vested in their plan accounts.

The partial termination rule is therefore relevant to plans that include employer contributions that are subject to a vesting schedule.

March 31, 2021 comes into play because it is the date set under Division EE, Section 1, Title II, Section 209 of the Consolidated Appropriations Act, 2021 as the snapshot date on which a partial plan termination may be avoided through rehires that restore earlier plan participation levels. Specifically, a plan will not be treated as having experienced a partial plan termination if on March 31, 2021, the number of active plan participants is at least 80 percent of the number covered by the plan on March 13, 2020 (the beginning of pandemic-related stay at home orders). For purposes of this rule, “active” status relates to the plan, not payroll, meaning that the individual maintains a plan account but may or may not be actively employed. Clearly, however, adding new hires who establish accounts under the plan will result in increased plan participant numbers as the March 31, 2021 date approaches.

The partial plan termination relief applies during any plan year which includes March 13, 2020 to March 31, 2021 period. If you have questions about application of this new rule to your 401(k) or other benefit plan, don’t hesitate to contact us.

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