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.

  1. 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.
  2. 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.  
  3. The assistance must be fully employer-funded and may not be offered as an alternative to employees’ existing or additional cash compensation.
  4. 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.

Photo credit: Standsome Worklifestyle, Unsplash

IRS Prioritizes Guidance on Student Loan Repayment Contributions

On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022.  Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming. 

Current State of the Law

The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs.  In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.

In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments.  Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program.  Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability.  The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.

 The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.”  Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals.  The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.

Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.  

Proposed Legislation

Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement.  As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0.  Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments.  “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses.   Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).   

What Future IRS Guidance Might Hold

Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:

  • Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
  • Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
  • Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
  • Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.

Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.

Photo credit:  Mohammad Shahhosseini, Unsplash

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.