The Consolidated Appropriations Act (CAA) signed into law in December 2020, allows employers to offer student loan repayment as a tax-free benefit under an educational assistance program. For employers looking for new ways to support employees with student loan debt, this is a welcome step and more legislative changes in this area could be coming soon. The IRS is prioritizing guidance that would allow employers to make 401(k) plan matching contributions based on an employee’s student loan payments.
About 33% of Ayco’s corporate partners currently provide some form of assistance to employees with student loan debt—but only 20% of those offer an actual contribution toward the debt, with the other 80% offering tools to assist with managing debt and refinancing1. The tax-advantaged options are expected to drive an increase in the former over the coming years.
Educational assistance program change
The Coronavirus Aid, Relief and Economic Security (CARES) Act temporarily allowed employers to provide up to $5,250 in tax-exempt student loan repayment contributions or tuition assistance from March 27, 2020, through December 31, 2020. The CAA extends these provisions, allowing annual contributions through December 31, 2025.
Employers that sponsor an educational assistance program under IRC Section 127 can currently provide educational benefits to employees on a tax-free basis, up to $5,250 per year. Prior to the CARES Act, these programs were limited to payment of expenses incurred for education including, but not limited to, tuition, fees, books, supplies and equipment. Under the CARES Act, principal and interest payments on student debt were added to the expanded definition of amounts that can be reimbursed on a tax-free basis.
As an employer, you should keep in mind:
- Total combined education assistance benefits, including student loan repayments and reimbursement of tuition and other expenses, will still be limited to $5,250 per year
- Employer can pay above the $5,250 in a calendar year, but the excess would be subject to tax
- The student loan must be for the employee’s own education
- Payments can be made by the employer directly to the lender or to the employee
- The employer must have a written plan document outlining eligibility, expenses covered and how the plan will be administered
- If an educational assistance program already exists, the plan must be amended and documents must be updated to include student loan payment provisions
- The program cannot provide employees with a choice between educational assistance and other taxable income, such as cash, PTO or cafeteria plan benefits
Potential future solution
Many employees are unable to save for retirement as they struggle to balance longer-term priorities with paying off student loans. As a result, many are missing out on valuable matching contributions provided by their employers.
The IRS Chief Counsel's office stated recently that guidance as to allowing employers to make 401(k) matching contributions based on the amount employees are paying toward student loans is a priority. The IRS is still looking at how the guidance would apply to employer contributions, and how discrimination rules would work. They admitted that the project has been a bit delayed by work on other 401(k) matters.
