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. This issue has been percolating for some time, but employers have not been able to provide student loan benefits that were tax-advantaged compared to normal compensation.
Last week, Congress passed the CARES Act, which will be thought of as the stimulus bill by many people. But the CARES Act had many other provisions in it as well, including a temporary student loan repayment benefit that employers can now provide to employees.
The CARES Act amended section 127 of the Internal Revenue Code, which permits 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 Act has changed the definition of “educational assistance” to now 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 can now provide a student loan repayment benefit of $5,250 to employees tax-free for 2020 through an education assistance program. An employee can only receive a total of $5,250 tax-free in 2020 for educational assistance when adding up the amount of tuition assistance and student loan assistance.
This amendment is a welcome change, but the relief is limited and for many employers it may not be feasible to incur additional benefit costs this year. Not only is this new benefit temporary, but to offer this benefit, the employer must have a formal education assistance program. To qualify as an education assistance program, the benefit must be an additional employer contribution, not in lieu of employee compensation (i.e., employees cannot be given a choice between receiving benefits under the plan and receiving normal compensation). Education assistance programs are also required to be drafted on a written plan document, which means that employers without a plan will have to adopt a new plan, and employers with a plan will likely need to amend their current plan document to provide for this new temporary benefit.
The CARES Act allows employers to ease the burden of student loan debt for their employees, but only if they act quickly. If you have questions about education assistance programs or any other changes made to benefit plans regarding the CARES Act, please contact a Graydon attorney.
