Employers want to attract and retain the best talent available. Employers today are cognizant that employees entering the workforce are burdened by mounting student loan debt, and many employers have explored the benefit options available to provide student loan debt relief for their employees. Until the CARES Act, employers were for the most part unable to provide student loan benefits that were tax-advantaged compared to normal compensation. The CARES Act provided a temporary provision that enabled employers to provide tax-advantaged benefits until January 1, 2021, and now this provision has been extended by the Consolidated Appropriations Act for five more years.
The CARES Act amended section 127 of the Internal Revenue Code, which is the Code section that has long permitted an employer to provide an employee a tax-free benefit of up to $5,250 a year for “education assistance” provided through an education assistance program. The CARES Act changed the definition of “educational assistance” to include payments made by the employer to an employee before January 1, 2021 for principal and/or interest on qualified education loans incurred by the employees. In short, employers could provide a student loan repayment benefit of $5,250 to employees tax-free for 2020 through an education assistance program.
Although the CARES Act amendment was a welcome change, the bill did not attract a lot of attention from employers. Not only was the incentive temporary, but employers without a program in place would have to adopt a formal education assistance program for a 2020 benefit, and many employers could not afford to provide an extra incentive in a year with a global pandemic. The extension provided in the Consolidated Appropriations Act making this benefit available until January 1, 2026 makes the downsides to the CARES Act provision more palatable, and shows that Congress is serious about providing solutions to the student loan debt crisis.
Education assistance programs must meet certain mandatory requirements to provide tax-advantaged benefits. For example, all plans must have a written plan document, and all benefits must be additional employer contributions, not in lieu of employee compensation (i.e., employees cannot be given a choice between receiving benefits under the plan and receiving normal compensation). Please contact a Graydon attorney if you are interested in providing an education assistance program with a student loan repayment incentive, or have any other questions regarding the changes made to benefit plans by the year-end Consolidated Appropriations Act.
