Employer-Paid Student Loan Relief for 2020 | Marriage law group, certified

On March 27, 2020, the Chairman signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Tucked away in the $3 trillion package, the CARES Act provides a limited window for employers to provide tax-free payments on their employee’s student loan debt. Specifically, Section 2206 of the CARES Act provides an exclusion for certain employer payments relating to principal and interest on employee student loan debt in 2020. Details on the payments follow.

The program

Employers who already have an education assistance program under Section 127 of the Internal Revenue Code are halfway there. CARES Act relief allows an employer to modify their 127 plan to allow direct pay-to-lender, or pay-to-employee, to pay/repay principal and interest payments on a “business loan”. qualified studies” contracted by the employee for the education of the employee. For this purpose, a qualified student loan is defined as a loan taken out by the employee to pay for higher education expenses (tuition, textbooks, fees, etc.) of a qualifying student (generally defined as a student in a diploma or certificate program and taking at least half of the normal full-time course load for the program of study). This includes refinanced loans. Notably, however, this does not appear to extend to education loans for spouse, dependents, grandchildren, etc. of an employee.

This extension of plan 127 is optional. However, if elected, the employer must notify the employees of this change to the program. Additionally, employees cannot choose between getting (1) cash or other taxable wages/benefits and (2) the student loan benefit. The program cannot be offered as part of a cafeteria plan. The program also cannot discriminate in favor of highly paid employees (definition in Code section 414(q) as it applies to qualified plans, generally $125,000 or more in 2019 or a 5% owner). There is also a 5% limit on the amount that can be paid out to shareholders and owners.

On the plus side, these programs are not considered ERISA plans, so there is no funding requirement for this benefit, and the plan can be terminated at any time.

The tax advantage

Code Section 127 education assistance programs can provide up to $5,250 in tax-free payments for education expenses. These expenses now include student loan repayments through the end of 2020. These include a single individual limit for the employee, regardless of how many of their employers have such programs. Employers can also provide tax-free payments to former employees, such as those who have retired, gone on disability, or been laid off.

Next steps

Employers looking to provide one of their employees with tax-free assistance with student loan debt should check to see if they have an existing 127 Education Assistance Plan. If a 127 plan is in place, consider expanding the program for 2020 to help with student debt repayment and inform employees of the benefit. For employers who do not yet have a 127 plan, consider adopting a written plan for 2020, which may be limited to student loan repayment only. These programs are relatively easy to install.

This CARES Act relief gives employers the ability to repay up to $5,250 tax-free from student loans to employees. Notably, as long as the classification does not favor HCEs, the benefit may be limited to, for example, COVID-19 frontline responders, essential workers during COVID-19, etc. Payments can be made directly to the lender (or to the employee, for example, on documentation of loan repayments).

Ideally, Congress will extend this relief beyond 2020, but for now, consider how this valuable student loan benefit can be offered to your employees burdened with student loan debt.

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