Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers can now make nontaxable payments of up to $5,250 to employees as student loan repayment assistance, but only if the payments are made by December 31, 2020, under an educational assistance program that meets the requirements of Internal Revenue Code (Code) Section 127. By utilizing such a program, both employers and employees will avoid federal payroll taxes on qualifying payments, and employees will save on federal income taxes that would otherwise apply.     

Background

Until fairly recently, there was no apparent way for an employer to provide student loan repayment assistance on a nontaxable basis. As a result, despite the well-documented negative impact of burgeoning student loan debt, student loan repayment assistance remained a relatively unattractive benefit. As we discussed in a previous article, this changed somewhat in 2018 when the Internal Revenue Service issued a private letter ruling allowing an employer’s program to match student loan repayments with contributions to the employer’s retirement plan. Such a matching program helps employees struggling to adequately save for retirement while paying down student debt, but it does not provide direct assistance to repay student loans. Now, with the passage of the CARES Act, employers can temporarily make direct, nontaxable payments to employees or lenders to assist employees with the repayment of their student loans.

Key Requirements

To take advantage of this benefit, employers who already maintain an educational assistance program will need to amend their program, and employers who do not already maintain such a program will need to adopt one. The following provides an overview of some of the key requirements of an educational assistance program that provides for student loan repayment assistance:

• Written Plan - The program must be set forth in a written plan document. There are no specific requirements as to the form of the written plan document, but the document should fully describe the eligibility, benefits, and rules of operation and should be formally adopted by the employer.
• Notice - Employers must provide reasonable notification of the availability and terms of the program to eligible employees. Often, the program or plan document is prepared to also serve as the notice that may be distributed to employees.
• Eligibility - Except for certain owners, all employees may be eligible to participate in the program. Employers, however, may limit eligibility in a variety of ways (e.g., employees with a certain title or employees in a certain location), but any eligibility restrictions must not discriminate in favor of highly compensated employees. Discrimination issues can be avoided by making all employees eligible or by excluding all highly compensated employees.
• Benefits - An employer may provide up to $5,250 in educational assistance to an employee each year under the program. Historically, such assistance has been limited to reimbursing employees for expenses, paying expenses on their behalf, or waiving expenses (if the employer is an educational institution) the employee incurs for education while employed. However, under the CARES Act, effective for payments made by employers from March 27, 2020, through December 31, 2020, educational assistance includes payments of principal or interest on a “qualified education loan,” as defined in Code Section 221(d)(1), incurred for the education of the employee. The payments may be made directly to lenders or as reimbursements to employees and are combined with any other payments under the program for purposes of applying the $5,250 maximum.
  • For this purpose, a “qualified education loan” is a debt incurred by the employee solely to pay qualified higher education expenses incurred by the employee around the same time and during a time when the employee was an eligible student. See IRS Publication 970 for more details.
• Substantiation - Employers should require that employees receiving benefits under the program substantiate their expenses.
• No Cash in Lieu of Benefits - Employers cannot offer employees benefits under the program in lieu of a cash payment. In other words, employees cannot “opt-in” or “opt-out” of benefits.
• Claw-Back Provision - The program may require that an employee who receives benefits under the program and does not satisfy some subsequent condition, such as remaining employed for one year, repay the benefits. Such a provision, however, is not always enforceable under state law and can be difficult to enforce as a practical matter.