Within the Consolidated Appropriations Act, Congress extended the company student loan repayment provision to 2025.  The original provision was introduced as part of the CARES Act using Section 127 of the IRS code.  It was initially planned to expire on 12/31/2020.

This company benefit falls under the same rules of a tuition reimbursement benefit.  It allows an employer to reimburse an employee for tuition and some related expenses up to $5,250 per year.  The amount reimbursed is a tax-free event for both the employee and employer.  Before the CARES Act, these student loan repayment contributions were taxed as income to the employee and were considered as salary expense for the employer.

Student Loan Repayment Provision Background

Due to college costs increasing and employees having more student debt, human resource departments began to investigate student loan assistance programs.  This benefit was to improve retention, attract better talent, and reduce financial stress.

Various student loan assistance programs were proposed and were expected to be approved under the 2018 Tax Reform Bill but that did not happen.  The IRS did adopt a private letter ruling which allowed additional company contributions to be made directly to employee’s retirement account if they had student debt.  Some companies did implement a student loan repayment benefit but those contributions were taxable events until the CARES Act approval.

Student Loan Assistance Benefit Impact

With the provision extension, more companies are likely to investigate and implement a student loan assistance benefit.  According to the 2020 Bank of America Workplace Benefits Report, student debt is the third-highest debt item of employees and impact women employees significantly more than men.  Nationally, student debt is the second-highest debt item behind mortgages.  It is higher than auto loans and credit card debt.

Financial Wellness has been a growing trend for more companies.  By reducing financial stress, employees are more productive, easier to retain, and results in higher satisfaction levels.  A student loan repayment assistance seems like a good place to start especially if you have a tuition reimbursement benefit in place.

Student Loan Provision Example

With the extension, companies will have the time to better evaluate the cost and impact it will have on their employees.

Under this new student loan repayment benefit, if an employee had $5,000 of student debt loan interest and principal payments in a specific tax year, the company’s policy states it will reimburse up to the $5,250 limit.  The employer could issue a check to the employee for the $5,000 assuming the proper documentation was provided.  The $5,000 is deducted by the company as an expense and there are no taxes due from the employee or employer.

Before this provision change, the $5,000 payment would require both the employee and employer to pay the associated income tax that was due.  The Social Security tax liability for both individuals would be approximately $382.  Additionally, the employee would need to pay the federal and state income tax based on their tax filing status and tax bracket.  The employee could see a net reduction of the reimbursement amount of over $1,000 due to taxes.  Under this provision, none of this will now be required.

Providing Better Student Loan Repayment Advice

For employees to maximize this benefit, employers need to provide better student loan repayment advice and not just money.  Since 2016, more student loan dollars are now repaid using an Income-Driven Repayment (IDR) than traditional fixed repayment methods.  This is a significant change because it moves the advice from the individual employee to their household.

If a married employee does not properly understand how their IDR method and their tax filing options work together, then a portion of the company’s contribution could still be wasted on taxes.  PayForED’s Student Loan Repayer is the first solution to help the employee household navigate all their options.

For companies that take this household approach, it broadens the benefit to employees who may not have student debt but their spouse does.  It will not allow the company to contribute to the non-employee loans but will improve the financial wellness of the employee and their family.

Student Loan Assistance Requirements

As state above, this provision is an extension of the current Section 127 IRS rules related to Tuition Reimbursement.  Here is a list of requirements that you need to have:

• Need to have a written plan
  • If your company currently has a tuition reimbursement plan that language will need to be updated. If you do not, there are no specific documentation rules or format.  It should include:
    • Eligibility
    • Benefit limits
    • Documentation of expense
  • Define Benefit Coverage
    • There are specific rules that define “qualified education loan” under Code Section 221 and IRS Publication 970. The document should refer to those qualifications’ reimbursement expenses.
    • The $5,250 is the maximum award.  Companies can implement a lower amount.
  • Claw-Back or Retention Requirement
    • The plan can allow the company to put a claw-back provision and reasonable employment requirement after the reimbursement is provided.
  • Employee Notification
    • This benefit needs to be made public and made available to all employees under your program eligibility rules. Discrimination issues need to be reviewed and consider when developing eligibility.

Open Issues

We are still waiting for some additional information on reporting requirements and the impact it may have on other student loan tax items.  As an example, will a borrower still be able to deduct additional student loan interest if they receive a reimbursement amount under their total interest paid?

Student Loan Repayment Provision Summary

With the extension of the student loan repayment benefit law, employers can now offer a new way to help their employees.  Implementation is simple especially if you already have a tuition reimbursement benefit in place.

This benefit is a step in the right direction to solving the student debt crisis.  At PayForED, we believe a student loan assistance benefit needs to help more than just employees who have student loans.  To solve the problem, we must also provide solutions to employees and their families that are planning and paying for college now.  With this broader approach, more employees can feel that their employer is taking a holistic approach to their financial wellness