Tax-free Student Loan Repayment Benefits
The Student Loan Debt Challenge
Current US student debt topples $1.7 trillion dollars for nearly 4.4 million Americans in the United States. The Fed Chairman has stated national student debt levels hinder the performance of the overall economy. The average student debt of $37,500 is severely impacting quality of life decisions including saving for retirement, buying a house, getting married or starting a family.
Competition for talented employees is on the rise. Employers are looking to enhance benefits programs to improve recruitment and retention for valuable employees. The Cares Act Section 2206 has made employer payments towards employee student debt tax-free for up to $5,250 annually. This is an appealing private sector solution to a rapidly growing societal problem.
The CARES Act and Employer Student Loan Contributions
The CARES Act Section 127 of the IRS code, Student Loan Repayment provision allows employers to contribute up to $5,250 tax-free annually to their employees' student loans and has been extended from the previous deadline of December 31, 2020 to December 31, 2025.
The IRS tax code of 127 was created by congress in 1978 as a temporary, expiring tax benefit allowing employers to provide tax-free assistance to their employees who continued to pursue their education while working. It was made Permanent in 2012.
How did the CARES act make employer student loan repayment tax-free?
The CARES Act of March 2020, congress temporarily added the option for employers to also provide student loan debt relief for its employees. Though mostly known for providing stimulus checks and pausing federal student loans, it also added legislation that would make the employer student loan repayments tax-free until the end of December 2025.
What is Section 2206 of the CARES Act?
The CARES Act Section 2206, allowed the exclusion for certain employer payments of student loans.
(B) in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, [...].
The enhancements made to section 127 of the irs code from 1986 with the CARES Act of March 2020 could still be made permanent and also expand the annual amount allowable as a tax free employer provided assistance benefit.
What is the Upskilling and Retraining Assistance Act (URA Act)?
The Upskilling and Retraining Assistance Act, also known as the URA Act, is a bill that was reintroduced to Congress May 2021 by U.S. Senators Todd Young (R-Ind.) and Maggie Hassan (D-N.H.), along with Senators Catherine Cortez Masto (D-Nev.) and Tim Scott (R-S.C.). This bill would expand the tax exclusion in CARES act section 127 of the irs code from $5,250 to $12,000 a year for the next two years.
The URA Act is currently awaiting consideration in the Senate Finance Committee's markup process.
Who Can Benefit from the CARES Act Student Loan Repayment provision?
Both employers and employees can benefit. Employers are able to make payments toward employee student loans on a tax-free basis (up to $5,250 annually), which enables employers to enhance recruitment & retention. Employees are able to receive contributions toward student loans on a tax-free basis (up to $5,250 annually) which can help employees pay down student loan balance faster and reduce the payback period of the loan.
Student Loan Tax Exemption Eligibility
As defined by the IRS, the loan institution may be federal or private. Only qualifying loans are eligible for tax-free status through defined Section 127 Plans. For more information, see IRS Publication 15-B Educational Assistance section.
Some takeaways for employers looking to take advantage of the new section 127 of the irs tax code improvements:
- Allows employers to subsidize and / or reimburse employee student loan payments
- $5,250 maximum per employee
- Tax deductible for employers, and excluded from taxable income from employee
- Be a legitimate employee of the LLC or S Corp
- Not own more then 5% of the LLC or S Corp
- Not be your dependent
- "NAICU - Tax Code Section 127 Employer provided education assistance", NAICU https://www.naicu.edu/poListItemcy-advocacy/issue-briefs/tax-poListItemcy/tax-code-section-127-employer-provided-education-assistance
- "H.R.1043 - Employer Participation in Repayment Act of 2019", Congress https://www.congress.gov/bill/116th-congress/house-bill/1043
- "H.R.133 - ConsoListItemdated Appropriations Act, 2021", Congress https://www.congress.gov/bill/116th-congress/house-bill/133/text
- "One hundred sixteenth congress of the United State of America", Congress https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pd
- IRS Publication 15-B https://www.irs.gov/publications/p15b
- "Upskilling and Retraining Assistance Act" URA Act, Congress https://www.congress.gov/bill/117th-congress/senate-bill/1802