Employer Tax-Free Student Loan Repayment Available Through 2025

Employer Tax-Free Student Loan Repayment Available Through 2025

Question: How did the CARES Act and CAA modify and broaden upon the §127 tax-free certified instructional help program advantages out there to employers?

Short Answer: Employers can now present as much as $5,250 in annual student loan reimbursement help advantages to workers on a tax-free foundation by way of 2025.

General Rule: Section 127 Educational Assistance Program

Employers could present as much as $5,250 yearly in tax-free compensation to workers below a certified instructional help program.  Such packages have to be maintained pursuant to a separate written plan doc, and the employer should present affordable notification of the supply and phrases of this system to all eligible workers.

Qualified instructional help packages are topic to nondiscrimination guidelines to make sure this system doesn’t discriminate in favor of extremely compensated workers.

The important benefit of a §127 instructional help program (as opposed working situation fringe instructional advantages below §132) is that the tutorial bills coated by this system don’t have to be work-related.

However, previous to the CARES Act and the Consolidated Appropriations Act, 2021 (CAA) modifications, student loan reimbursement help didn’t qualify as an eligible tax-free profit below §127.  Prior eligible bills included the price of books, tools, charges, provides, and tuition.

New Benefit Available Through 2025: Tax-Free Student Loan Repayment Assistance

The CARES Act initially offered that employers might pay for or reimburse as much as $5,250 of an worker’s student loans on a tax-free foundation from March 27, 2020 (the date of enactment) by way of the tip of 2020 below a §127 instructional help program.  The CAA prolonged the supply of this tax-free student loan reimbursement help possibility for employers by way of the tip of 2025.

The finish result’s that tax-free instructional help advantages made after March 27, 2020 and earlier than January 1, 2026 could embrace funds of principal or curiosity on any “qualified education loan” incurred by the worker for the training of the worker.  Employers could make the cost to the worker or on to the lender.

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The $5,250 annual most per worker applies for all §127 funds made by an employer below a certified instructional help program.  This contains the combination of any of the beforehand out there types of advantages (books, tools, charges, provides, tuition) mixed with any student loan reimbursement help.  Educational help quantities offered by employers in extra of $5,250 per yr have to be included within the worker’s taxable revenue.

Definition: Qualified Education Loan

Tax-free instructional help below the CARES Act and CAA by way of 2025 is accessible for an worker’s “qualified education loan.”

A “qualified education loan” is a loan taken out by the worker to pay for the worker’s “qualified education expenses” inside a “reasonable period of time” earlier than or after taking out the loan for training offered throughout an “academic period” for an “eligible student” to attend an “eligible educational institution.”

Qualified Education Expenses:

These bills are the overall prices of attending an eligible instructional establishment.  They embrace quantities for the next objects:

  • Tuition and charges
  • Room and board (with limitations)
  • Books, provides, and tools
  • Other mandatory bills (reminiscent of transportation)

Reasonable Period of Time:

Qualified instructional bills are handled as paid or incurred inside an inexpensive time frame earlier than or after the worker takes out the loan if they’re paid with the proceeds a federal postsecondary training loan program.

If not paid with the proceeds of that kind of loan, the bills are handled as paid or incurred inside an inexpensive time frame if each of the next necessities are met:

  • The bills relate to a particular educational interval; and
  • The loan proceeds are disbursed inside a interval that begins 90 days earlier than the beginning of that educational interval and ends 90 days after the tip of that educational interval.

Academic Period:

An educational interval features a semester, trimester, quarter, or different interval of examine (reminiscent of a summer season college session) as fairly decided by an academic establishment.

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Eligible Student:

An eligible student is a student who was enrolled a minimum of half-time in a program resulting in a level, certificates, or different acknowledged instructional credential.  A student was enrolled a minimum of half-time if the student was taking at lest half of the conventional full-time workload for the student’s course of examine (usually as decided by the tutorial establishment).

Eligible Educational Institution:

An eligible instructional establishment is usually any accredited public, nonprofit, or proprietary (privately owned profit-making) faculty, college, vocational college, or different postsecondary instructional establishment.  The establishment should even be eligible to take part in a student assist program administered by the U.S. Department of Education—as is the case with just about all accredited postsecondary establishments.

What the Future May Hold: Room for Educational Assistance Program Improvement Moving Forward

Congress might additional broaden and enhance upon the CARES Act and CAA tax-free student loan reimbursement help provision in three important methods:

  • Make the tax-free student loan reimbursement addition everlasting. Employers could also be hesitant so as to add a strong student loan reimbursement program within the coming years because the sundown of the CAA tax-free extension on the finish of 2025 continues to loom nearer.
  • Index the restrict for inflation. The $5,250 instructional help program restrict below §127 initially dates to 1979.  Given the extraordinary improve in instructional (together with student loan) prices since then, Congress ought to think about adjusting the restrict yearly to an academic inflation index.
  • Permit worker pre-tax contributions. Educational help reimbursement help have to be solely employer-paid as a result of this system can not permit workers to decide on to obtain taxable money as an alternative of instructional help.  Congress might simply rectify that flaw by including §127 certified instructional help packages to the record of §125 certified advantages, and thereby make the most of the cafeteria plan secure harbor from the doctrine of constructive receipt to facilitate worker pre-tax contributions.
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Additional Resources

Regulations

CARES Act Section 2206 [Initial Period from March 27, 2020 – December 31, 2020]:

https://www.congress.gov/bill/116th-congress/house-bill/748/text

SEC. 2206. EXCLUSION FOR CERTAIN EMPLOYER PAYMENTS OF STUDENT LOANS.

(a) IN GENERAL.—Paragraph (1) of part 127(c) of the Internal Revenue Code of 1986 is amended by putting ‘‘and’’ on the finish of subparagraph (A), by redesignating subparagraph (B) as subparagraph (C), and by inserting after subparagraph (A) the next new subparagraph:

‘‘(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, and’’.

(c) EFFECTIVE DATE.—The amendments made by this part shall apply to funds made after the date of the enactment of this Act. 

CAA Division EE §120 [Extension Through 2025]:

https://www.congress.gov/bill/116th-congress/house-bill/133/text

SEC. 120. EXCLUSION FOR CERTAIN EMPLOYER PAYMENTS OF STUDENT LOANS.

(a) IN GENERAL.—Section 127(c)(1)(B) is amended by putting ‘‘January 1, 2021’’ and inserting ‘‘January 1, 2026’’.

(b) EFFECTIVE DATE.—The modification made by this part shall apply to funds made after December 31, 2020.

 

 

Disclaimer: The intent of this evaluation is to supply the recipient with basic info relating to the standing of, and/or potential considerations associated to, the recipient’s present worker advantages points. This evaluation doesn’t essentially totally tackle the recipient’s particular problem, and it shouldn’t be construed as, neither is it meant to supply, authorized recommendation. Furthermore, this message doesn’t set up an attorney-client relationship.  Questions relating to particular points must be addressed to the particular person(s) who present authorized recommendation to the recipient relating to worker advantages points (e.g., the recipient’s basic counsel or an legal professional employed by the recipient who makes a speciality of worker advantages legislation).