New Tax Incentive Encourages Student Loan Repayment Assistance

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Employers May Deduct Cost

A new tax incentive helps employers provide student loan repayment assistance to their workers, which ultimately could help businesses recruit or retain employees who are carrying education loan debt.

A tax incentive for assisting employees with higher education costs has existed for several years, and many employers have tuition assistance programs built into their employee benefit plans. But the expansion to include assistance with repayment of student loans is new.

The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted in March 2020, expanded the existing education assistance program, allowing employers to deduct the costs of assisting employees with student loan payments. This expansion was scheduled to expire in December 2020, but the Consolidated Appropriations Act, enacted December 27, 2020, extended it through 2025.

In certain industries and jobs, providing student loan repayment assistance could prove to be a strong recruitment or employee retention benefit. Total student debt stands at about $1.6 trillion nationwide, and approximately $11.5 billion in Kansas, which ranks 19th in the nation in student loan debt.

Under the student loan repayment expansion, employers may deduct up to $5,250 per employee each year in overall education assistance benefits, which include student loan repayment assistance and post-secondary tuition assistance for employees who are currently in school. For the employee, the amount is tax free, meaning it is not included in taxable income.

If an employee has both tuition and loan repayments, the most they can exclude from their income is $5,250. The employer may choose to reimburse more than that, but any additional amount is taxable to the employee.

Other rules apply, including:

  • Employers may pay the loans directly to the loan servicing organization or may reimburse employees for payments they have made.
  • Employees may not deduct student loan interest for any amounts that have been paid by the employer.
  • Employers may not limit student loan assistance to highly compensated employees or other classes of workers. Additionally, the assistance cannot be given to more than 5% of shareholders or their dependents.
  • If offered, the student loan assistance benefit must be written into a company’s educational assistance benefit program as a plan amendment.
  • All employees must be informed of the student loan assistance benefit and its terms.
  • Only student loans that are in the employee’s name and for the employee’s education are eligible for workplace student loan assistance. The benefit may not be extended to employees’ dependents.

If you are considering adding student loan repayment assistance to your business’ education assistance plan, contact your Adams Brown advisor.