Show Employees You “CARE” with Student Loan Repayment Assistance

April 26, 2021

By Rachel Milbauer Cohen, CPA

Are you a business owner trying to figure out how to encourage and support your employees after a year of minimal or lost wages? Nontaxable student loan repayment assistance may be exactly what you’re looking for.  Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers became eligible to make nontaxable payments of up to $5,250 to employees as student loan repayment assistance. The initial Act made this possible only if payments were made by December 31, 2020; the opportunity was later extended by the Taxpayer Certainty and Disaster Relief Act of 2020, extending the provision to include payments through December 31, 2025.

What does this mean for you as an employer? Prior to the CARES Act, any payments made toward an employee’s education assistance were deemed as taxable wages to the employee, also resulting in payroll taxes charged to both the employer and the employee. Now an employer is eligible to contribute up to $5,250 as a tax-free reimbursement to each qualifying employee, per calendar year, saving the company payroll tax costs. As with any program, there are a number of steps that need to be followed in order to properly and legally execute and offer this plan to your employees. Here are the top five things you need to know:

  1. You must set up an Education Assistance Program. Enlist your HR specialist to create a program that follows the guidelines necessary to make this an achievable and legal plan, with predetermined considerations for how the plan will be executed, and what the criteria will be for offerings to employees. The program must be written and in compliance with IRC Sec. 127.
  2. Communication is key. Once the Education Assistance Program is fully set up, employees must be notified and made aware of the benefits offered to them, as well as any limitations to the program.
  3. The plan can’t discriminate in favor of highly compensated employees. In 2021, a highly compensated employee is one receiving compensation in excess of $130,000. Greater than 5% shareholders/owners are also limited to receipt of 5% of amounts paid out by the employer under this program.
  4. Employers can’t offer educational assistance in lieu of a bonus or other compensation. In order to qualify under IRC Sec. 127, employers cannot offer educational assistance as a replacement for other compensation.
  5. Employers should consider the effect on employees’ student loan interest deduction. An employer could consider designating any loan payments specifically as principal in order to avoid the possibility of inadvertently reducing the employee’s student loan interest deduction.

This program can be a great tool to help retain current talent and attract future employees. Consultation with both your HR specialist and a qualified tax professional is essential to kicking this program off and providing that extra benefit to your employees that your competitors may not have considered.

About Rachel Milbauer Cohen

Rachel Milbauer Cohen is a Senior Manager in the Private Business Services Group with nearly 10 years of public accounting experience.