Ibrahim Gardner
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, to provide relief to employers and workers affected by the COVID-19 pandemic. The Act includes provisions that allow employers to contribute towards their employees' student loans and make tax-free payments of up to $5,250 per employee. This change in legislation has incentivized employers to assist their employees with student loan repayment, attracting and retaining talent, and improving diversity and workplace culture.
| Characteristics | Values |
|---|---|
| What does the CARES Act allow? | Employers to contribute to employees' student loans tax-free |
| Who does it apply to? | Employers with existing educational-assistance programs and employers considering creating a new program |
| What are the limitations? | Employers can contribute up to $5,250 per employee until the end of 2020 |
| What are the benefits? | Employers can attract, retain and engage talent |
| What are the recommendations? | Employers should consult with their tax advisors and experienced counsel |
| What are the requirements? | The program must be a separate written plan for the exclusive benefit of employees and cannot be discriminatory in favor of highly compensated employees |
| What are the exclusions? | Loans taken out by a parent of the employee or for the education of an employee's child do not qualify |
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What You'll Learn
- Employers can contribute up to $5,250 per employee towards student loan repayment
- Employers can make payments directly to the employee or lender
- Student loan repayment helps employers attract and retain talent
- Student loan repayment is only applicable to qualified education loans
- The CARES Act allowed employers to contribute to student loans tax-free
Employers can contribute up to $5,250 per employee towards student loan repayment
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, to provide relief during the global coronavirus pandemic. The act allows employers to contribute towards their employees' student loan repayment.
Prior to the CARES Act, employer-sponsored Student Loan Repayment was treated as a taxable benefit, requiring the employer to pay payroll taxes and withhold income taxes for participating employees. This made it more tax-efficient for employees to pay off their loans themselves. However, with the CARES Act, employers can now contribute pre-tax dollars towards their employees' student loans, making it more efficient for companies to pay down loans.
Section 2206 of the CARES Act allows employers to contribute up to $5,250 per employee towards student loan repayment. This contribution is not included in the employee's gross income and must be made under an educational assistance program complying with IRC section 127. This means that the employee cannot choose between educational assistance and taxable remuneration; the employer must make the payments towards the employee's student loans. The program must also benefit employees who qualify under a classification set up by the employer that is not discriminatory towards highly compensated employees.
The educational assistance program does not need to be funded and permits payments for student loans incurred by the employee, not the employee's family. Employers can make payments directly to the employee or to the lender. It is recommended that employer payments go directly to the loan servicer to pay down the principal.
The CARES Act provides employers with a new mechanism to assist their employees with student loan repayment and is an attractive incentive for employees during the pandemic.
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Employers can make payments directly to the employee or lender
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, providing employers with a new mechanism to assist their employees with student loan repayments.
The CARES Act allows employers to contribute to student loans tax-free. Employers can now provide pre-tax student loan contributions that directly reduce employees' student debt. This is a change from before the CARES Act, when employer-sponsored student loan repayment was treated as a taxable benefit, requiring the employer to pay payroll taxes and withhold income taxes for participating employees.
There are some limitations to the CARES Act. Employers can contribute only up to $5,250 per employee, and the contributions must be made by January 1, 2021. Additionally, the employer must make the payments under an educational-assistance program complying with IRC section 127. This means that the employee cannot choose between educational assistance and taxable remuneration; they cannot, for example, opt for cash instead of student loan help.
Employers with existing educational-assistance programs should consider the new incentives offered by the CARES Act before deciding on any changes to their programs.
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Student loan repayment helps employers attract and retain talent
The CARES Act, signed into law on March 27, 2020, introduced a variety of provisions to help employers and employees affected by the COVID-19 pandemic. One of these provisions allows employers to contribute to their employees' student loans tax-free.
Student loan repayment programs are an effective recruitment and retention strategy for employers. They are an attractive benefit for employees, particularly those whose loan payments prevent them from saving for retirement. By offering student loan debt relief, employers can more easily attract and retain talent. Studies indicate that 86% of workers would commit to an employer for five years if they offered student loan support.
Student loan repayment programs can also improve employee engagement and productivity by alleviating financial stress. Employers can create programs that fit their budget and the needs of their employees, with common variations including recurring payments, signing bonuses, and paid time off (PTO) exchanges.
Prior to the CARES Act, employer-sponsored student loan repayment programs were considered taxable benefits, requiring employers to pay payroll taxes and withhold income taxes for participating employees. As a taxable benefit, student loan repayment has helped top employers in every industry hire 13% faster and retain talent 36% longer.
With the CARES Act, employers can now offer student loan repayment benefits of up to $5,250 per employee tax-free through 2025. This provision offers significant tax advantages to employers and makes student loan repayment programs a competitive benefit in the fight for top talent.
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Student loan repayment is only applicable to qualified education loans
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law on March 27, 2020, providing employers with a new mechanism to assist their employees with the repayment of student loans. The CARES Act included a variety of new provisions to help employers and workers affected by the COVID-19 pandemic. Among these provisions were two that were aimed at student-loan repayment.
Firstly, the CARES Act allows employers to make tax-free payments toward their employees' student loans. This is a significant change, as prior to the Act, employer-sponsored student loan repayment was treated as a taxable benefit, requiring the employer to pay payroll taxes and withhold income taxes for participating employees. Now, employers can make payments either directly to the employee or to a lender, up to a limit of $5,250 per employee.
Secondly, the CARES Act allows borrowers to suspend payments under certain loan programs. This provision encourages borrowers to delay repayment by freezing interest, payments, and involuntary collection.
It is important to note that student loan repayment under the CARES Act is only applicable to qualified education loans. This means that the loan must have been incurred by the employee for their own education, and not for the education of a family member, such as a child or parent. To qualify as a "qualified education loan," the loan must meet certain criteria, such as being taken out solely to pay for "qualified higher education expenses," which includes tuition and fees, room and board, books, supplies, equipment, and other necessary expenses such as transportation.
Additionally, the CARES Act specifies that the educational assistance program must be a separate written plan of the employer, exclusively for the benefit of its employees, and must not be discriminatory in favor of highly compensated employees. This means that no more than 5% of the amounts paid by the employer for educational assistance can be provided to individuals who own more than 5% of the stock or capital profits interest in the employer. Furthermore, the employee must have no option to choose between educational assistance and taxable remuneration; the employer cannot allow the employee to opt for cash instead of student loan assistance.
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The CARES Act allowed employers to contribute to student loans tax-free
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The Act includes a variety of provisions to help employers and workers affected by the COVID-19 pandemic. Notably, the CARES Act allows employers to contribute to their employees' student loans tax-free.
Prior to the CARES Act, employer-sponsored Student Loan Repayment was treated as a taxable benefit. This meant that employers were required to pay payroll taxes and withhold income taxes for participating employees. Under the CARES Act, employers can now provide pre-tax student loan contributions that directly reduce employees' student debt. This provision applies to payments made before January 1, 2021, and allows employers to contribute up to $5,250 per employee.
To take advantage of this provision, employers must set up an educational assistance program that complies with IRC Section 127. This means that the program must be a separate written plan that exclusively benefits employees by providing educational assistance. The program cannot provide eligible employees with a choice between educational assistance and other remuneration includable in gross income. Additionally, the program must not be discriminatory in favour of highly compensated employees.
By offering Student Loan Repayment, employers can attract, retain, and engage talent. It is expected that the number of employers offering this benefit will grow exponentially now that it is more tax-efficient for companies to pay down loans than it is for employees to do so themselves. Student debt is a burden that affects more than 45 million college-educated Americans, and the CARES Act provides a much-needed mechanism to assist with repayment.
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Frequently asked questions
Yes, the CARES Act allows employers to contribute to their employees' student loans.
Employers can contribute up to $5,250 per employee.
Yes, the contributions must be made before January 1, 2021.
No, the employee cannot choose cash instead of student loan help.
Yes, the employer can make payments directly to the employee or to the lender.
