Lori Meadows
In March 2020, the IRS established that employers could assist with pre-tax student loan repayment through a qualifying Educational Assistance Program. This provision, which was previously set to expire at the end of 2025, has now been made permanent by Congress. Employers can now contribute up to $5,250 per year, per employee, towards student loan payments without triggering income taxes for the employee or payroll taxes for the employer. This benefit applies to both federal and private loans and can be made directly to the loan servicer or reimbursed to the employee. However, any payments exceeding $5,250 are taxable as income to the employee and subject to employment taxes.
| Characteristics | Values |
|---|---|
| Can employers pay back student loans pre-tax? | Yes |
| Can employers pay back student loans post-tax? | Yes |
| Maximum annual exclusion for educational assistance per employee | $5,250 |
| Can employers favor highly compensated employees? | No |
| Can employers pay back student loans taken before employment? | Yes |
| Can employers pay back student loans taken by employees' spouses or dependents? | Yes |
| Can employers pay back student loans taken for room and board? | Yes |
| Can employers pay back student loans directly to the loan servicer? | Yes |
| Can employers pay back student loans by reimbursing employees? | Yes |
| Can employers include a length of service requirement prior to eligibility? | Yes |
| Can employers include a "claw-back" provision wherein an employee must satisfy some condition such as completing one year of service, or repay the benefit? | Yes |
| Can employers offer educational assistance programs and tuition reimbursement? | Yes |
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What You'll Learn
Student loan repayment as a non-taxable bonus
Student loan repayment assistance from employers is a valuable benefit for employees, and it can be provided as a non-taxable bonus. Until December 31, 2025, employers can assist with pre-tax student loan repayments under a qualifying Educational Assistance Program (EAP). This means that employees can exclude up to $5,250 per year from their income if it is used to pay off student loans through an EAP. Any amount above this limit will be considered taxable income.
This option was established by the IRS in March 2020 and was later extended by the Consolidated Appropriations Act of 2020. The IRS does not consider employer assistance with student loan repayments to be taxable income for the employee. This benefit not only helps employees with their student debt but also provides an incentive for employers to attract and retain talented workers.
To implement this, employers must establish a qualifying EAP with a written plan outlining the terms and conditions. The program must be offered on substantially the same basis to each member of a group of employees, such as full-time or part-time workers, and it cannot favor highly compensated employees. The EAP can include a length of service requirement and a "claw-back" provision, where an employee must complete a certain condition, such as one year of service, to receive or keep the benefit.
By taking advantage of this option, employers can provide valuable tax-free assistance to their employees struggling with student loan debt. Thinking of student loan repayment as a non-taxable bonus can be an attractive benefit for employees and a useful tool for employers to enhance their compensation packages.
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The CARES Act and tax-free employer student loan repayments
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 included a provision that expanded the coverage for education assistance under Section 127 of the IRS code. This allowed employers to repay up to $5,250 per year of student loans on behalf of an employee, without reporting the payment as income to the employee. This benefit can save the employer and employee more than $400 each by exempting the compensation from FICA taxes.
The CARES Act simply expanded the definition of “Educational Assistance” to cover employer student loan repayments made before a certain date. The Consolidated Appropriations Act of 2020 further extended this coverage through December 31, 2025.
To provide tax-free student loan repayment assistance, employers must establish an educational assistance program that complies with Section 127 of the Internal Revenue Code. This requires a written plan detailing the benefit’s terms and ensuring it is offered in a nondiscriminatory manner. The IRS defines a highly compensated employee as someone earning more than $150,000 in 2024, so companies must structure their programs accordingly. Payments must be made directly to the loan servicer or reimbursed to the employee after proof of payment.
It is important to note that employer educational assistance and tuition reimbursement are different. Educational assistance programs can cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Tuition reimbursement programs, on the other hand, typically cover only tuition and related expenses for courses taken while employed.
The tax-free benefit for student loan repayment has been beneficial for both employers and employees. It has helped employers attract and retain workers, while providing employees with financial relief and tax advantages.
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Educational assistance programs and their limitations
In March 2020, the IRS established the option for employers to include, in a qualifying Educational Assistance Program (EAP), the ability of employees to pay back their college loans, including principal and interest, with pretax dollars. This provision was included in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, which expanded coverage for education assistance under Section 127 of the IRS code.
Under this provision, employers can repay up to $5,250 per year of student loans on behalf of an employee without reporting the payment as income to the employee. This benefit can save the employer and employee money by exempting the compensation from FICA taxes. The amount paid by the employer is not reported as income on the employee’s W2 and is not subject to income tax. This exclusion from gross income applies only to the employee and does not include the employee's spouse or family members.
To qualify, employers must establish a separate written plan outlining the terms and conditions of the EAP. This plan must be provided on substantially the same basis to each member of a group of employees and must not favor highly compensated employees. The group must be defined under a reasonable classification set up by the employer, such as full-time or part-time workers. The plan can also include a length of service requirement prior to eligibility and a "claw-back" provision, wherein an employee must satisfy a certain condition, such as completing one year of service, or repay the benefit.
Educational assistance benefits do not include payments for meals, lodging, transportation, or tools and supplies (other than textbooks) that the employee can keep after completing the course. They also do not include courses involving sports, games, or hobbies unless they have a reasonable relationship to the business of the employer or are required as part of a degree program.
It is important to note that employer educational assistance and tuition reimbursement are different. Educational assistance programs can cover a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments. Tuition reimbursement programs, on the other hand, typically only cover tuition and related expenses for courses taken while employed.
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The IRS's stance on employer-sponsored student loan repayment
The IRS allows employers to provide tax-free assistance to employees for student loan repayments. This means that employers can pay up to $5,250 per year towards an employee's student loan without reporting it as income for the employee. This provision is part of the Educational Assistance Program (EAP) and is available until December 31, 2025.
To qualify, employers must establish a written EAP that meets specific requirements. The program must be offered to all employees on the same basis and cannot discriminate in favour of highly compensated employees. It can include a length-of-service requirement and a "claw-back" provision, although this may not always be enforceable under state law.
The IRS considers this benefit a "worthwhile fringe benefit" that can help businesses attract and retain talented workers. It is also beneficial for employees as it reduces their taxable income and provides relief from student debt.
It is important to note that the tax-free benefit is limited to $5,250 per employee per year. Any amount exceeding this limit will be considered taxable income for the employee and will be subject to employment taxes.
By taking advantage of this provision, employers can assist their employees in managing their student loan debt while also benefiting from potential tax savings.
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Employee benefit and talent attraction
In recent years, many borrowers resumed making student loan payments, with interest, after an unprecedented multiyear pause. This has resulted in student loan debt for more than 43 million people. In this context, employee benefits and talent attraction strategies that include student loan repayment assistance can be a valuable tool for employers.
In March 2020, the IRS established the option for employers to include student loan repayment as part of a qualifying Educational Assistance Program (EAP). This means that employers can now assist employees in paying back their college loans, including principal and interest, with pretax dollars. This option will be available until December 31, 2025. Importantly, the assistance provided by the employer cannot favour highly compensated employees. It must be offered on substantially the same basis to each member of a group of employees, such as full-time or part-time workers.
By offering student loan repayment assistance, employers can provide a valuable benefit to their employees, helping them save money and manage their finances more effectively. This can be a powerful tool for talent attraction and employee retention, as it demonstrates the employer's commitment to supporting employees' financial well-being. Additionally, it can set employers apart in a competitive labour market, helping them attract high-quality talent.
Furthermore, student loan repayment assistance can be structured as a non-taxable bonus with no strings attached. This means that employees who receive this benefit do not report it as income, and employers can also avoid payroll taxes on those amounts, saving money for both parties. The maximum annual exclusion for educational assistance, including student loan repayment, is $5,250 per employee. Any amount above this limit may be subject to tax as wages for the employee.
Overall, student loan repayment assistance offers a way for employers to provide meaningful support to their employees while also attracting and retaining top talent in a competitive market. With the permanent extension of this benefit, employers now have a powerful tool to enhance their employee benefits packages and improve their talent attraction strategies.
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Frequently asked questions
Employers can pay up to \$5,250 per year towards an employee's student loan without reporting it as income for the employee. Any amount over this is taxable.
The benefit of an employer paying an employee's student loan is that it is not considered taxable income for the employee, saving them money. It also helps employers attract and retain talent.
The scheme is currently set to run until December 31, 2025, although this deadline may be extended by future legislation.
