When the Consolidated Appropriations Act ("CAA"), 2021, was signed into law by Donald Trump on December 27, 2020, it meaningfully opened the door for employers to assist employees with student loan debt. The CAA authorized employers to contribute up to $5,250 per employee per year in loan repayment assistance. A similar provision previously was included in the CARES Act, however, it expired on December 31, 2020. With the short duration, few employers took advantage of the program. The newly enacted legislation remains in effect through the end of 2025, with the potential to be renewed thereafter.
The CAA amended Section 127 of the Internal Revenue Code to expand the definition of "eligible education expenses." Previously, employers could make tax-free contributions for an employee's tuition, fees and books without raising the employee's gross taxable income. Now, that phrase has been expanded to include loan repayment assistance. The CAA did not alter the prior limit of $5,250 for contributions.
The loans need not be related to the employee's employment with the employer and may have been incurred prior to the employment relationship. These employer-paid contributions do not raise the employee's gross taxable income and are tax-exempt to the employer. While these contributions will not impact an employee's gross taxable income at the federal level, you should consult with a tax professional to determine whether states offer a similar benefit.
Employers desiring to offer this benefit to employees need to develop an educational assistance program. Among other requirements, the program must be in writing and in compliance with Section 127 of the IRS Code. The program must:
- Not discriminate in favor of highly compensated employees (in 2021, a highly compensated employee is one receiving compensation in excess of $130,000), i.e., it must be available to most employees in your company;
- No more than 5 percent of amounts paid by the employer can be for individuals who are shareholders or owners;
- Employers cannot offer employees a choice between educational assistance and other remuneration (i.e., they cannot take a pay cut to receive it); and
- Employees must be given reasonable notification of the availability of and terms of the program.
With the five-year duration of the program, more employers are likely to take advantage of this program. Not only does it address the student loan crisis, but it is an attractive recruiting and retention tool for employers.
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