The Coronavirus Aid, Relief and Economic Security (CARES) Act offers a range of economic stimulus benefits and financial support programs for individuals and businesses. One CARES Act provision that has largely been lost in the shuffle allows employers to establish tax-free fringe benefit plans that repay employees’ student loan debt. Employers with existing educational assistance plans can amend their plans to permit student loan payments on behalf of employees. Or, they could establish a new plan to exclusively repay student debt.
This provision in the CARES Act applies to payments made between March 27, 2020, and December 31, 2020. However, it’s possible Congress could extend the deadline.
Educational Assistance Plans
An educational assistance plan is a formal benefit plan that supports the education and training of employees. It can be used to pay the educational expenses of employees directly or to reimburse employees for out-of-pocket costs.
The maximum annual exclusion for this plan is $5,250 per year per employee. Payments can cover tuition, books, equipment, fees and supplies, but not supplies that employees are allowed to keep after their course of instruction is complete, such as computers. The program may pay for undergraduate and graduate courses, but not for coursework involving sports, games or hobbies unless they’re required for a degree program or are related to the employer’s business. The costs of lodging, meals and transportation are excluded.
In addition, the following requirements must be met to qualify for the tax exemption:
- The plan can’t discriminate in favor of highly compensated employees (HCEs). For 2020, an HCE is any employee who owns more than 5% of the business or earned more than $125,000 in 2019.
- The plan can’t provide more than 5% of its benefits during the year to shareholders or owners who own more than 5% of the company.
- The plan can’t allow employees to choose to receive cash or other benefits that must be included in their taxable income.
- The employer must provide reasonable notice of the program to those employees who are eligible to participate.
Note that your company can choose to set additional standards for employees. For example, you might require a class grade of “B” or higher to receive payment under the plan. Or you may require employees to stay with the company at least a year after they complete courses or they’ll forfeit a portion of their reimbursement.
CARES Act Provisions
Under the CARES Act, you can make tax-free payments of $5,250 to cover employee student debt loan. This provision is designed to lessen the financial burden on some employees during the current public health and financial crisis. In short, it enables employees to pay off student loans faster. The tax exemption of payments makes the payoff even sweeter. For example, if an employee in the 24% tax bracket were to receive a $5,000 raise, he or she would walk away with $3,800 after tax. The actual value of a $5,000 tax-free student loan repayment, on the other hand, is $5,000.
Generally, loans that qualify for the exemption are also eligible for another CARES Act provision — the student loan deferral benefit. This suspends payments on certain student loans through September 30, 2020. Borrowers should double-check with their loan servicers to ensure eligibility.
This benefit can help employers retain prized employees and attract new talent. It may also inspire greater employee loyalty. However, you should know that the CARES Act exemption for student loan repayment plans isn’t available for all loans. Notably, private and refinanced loans aren’t eligible, nor are Perkins loans and Federal Family Education Loans (FFEL) that aren’t owned by the federal government. Perkins loans and FFELs may be consolidated into a Direct Consolidation Loan that’s eligible for the exemption. But borrowers should understand that consolidation could result in a higher interest rate.
Adopting the Benefit
If you decide to include the new CARES act provision in an existing educational assistance plan, there are several ways to do so. Your business may make:
- Upfront contributions to employees through regular payroll obligations,
- Bonus payments to be applied directly to employees’ student loan debt, or
- Automatic monthly contributions directly to loan servicers on behalf of employees.
If you don’t have an educational assistance plan, you’ll need to adopt a written plan for 2020 that covers only the repayment of student loans.
If your company has an educational assistance plan, it may be relatively simple to expand the program to help employees repay student loan debt. Otherwise, consider creating a temporary student loan repayment plan. The clocking is ticking on this benefit, so talk with your financial and employee benefit advisors as soon as possible.