One of Congress’s financial responses to the COVID-19 disaster is a short lived tax incentive for corporations to assist staff pay their student debt.
Until the top of 2020, employers can contribute as much as $5,250 towards an worker’s student loan steadiness and the cost can be free from payroll and revenue tax beneath a provision within the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. A separate provision within the CARES Act quickly pauses the month-to-month funds due on federally held student loans by means of Sept. 30, with 0% curiosity.
Fewer than 10% of corporations at present provide student loan reimbursement help. According to 1 2019 survey, greater than 60% of employed adults within the United States with student loans would think about switching corporations to achieve a student loan cost profit.
Will employers reap the benefits of this incentive to offer student loan help? Given pandemic-related cutbacks and enterprise challenges, many corporations could hesitate to create a brand new worker profit, besides maybe in fields the place intense job market competitors exists.
Helping staff pay their student loans
Traditionally, an employer’s student loan contributions are topic to payroll taxes and are taxable revenue to the worker. The CARES Act modifies this tax remedy for funds made after March 27, 2020, and on or earlier than Dec. 31, 2020. During this time span, staff can obtain as much as $5,250 to pay their student debt and exclude it from gross revenue (CARES Act, §2206).
Essentially, the CARES Act expands the scope of Sec. 127, which addresses employer-paid tuition advantages, to cowl student loan funds. The $5,250 that staff are permitted to obtain tax-free for his or her schooling beneath Sec. 127 can be utilized in 2020 for student loan reimbursement. The funds have to be utilized to the worker’s personal student debt, not the debt of the worker’s partner or dependents.
Specifically, the act amends Sec. 127(c)(1)’s definition of “educational assistance” that may be obtained tax-free from an employer to incorporate:
within the case of funds made earlier than January 1, 2021, the cost by an employer, whether or not paid to the worker or to a lender, of principal or curiosity on any certified schooling loan (as outlined in part 221(d)(1)) incurred by the worker for schooling of the worker.
Structuring a student loan cost program
Employers ought to remember that paying an worker’s student loan curiosity may inadvertently cut back the worker’s student loan curiosity deduction. Most student loan debtors can deduct as much as $2,500 in curiosity, however the CARES Act denies them the double tax advantage of having the ability to deduct curiosity that’s excluded from their revenue as a result of it was paid by their employer (see Sec. 221(e)(1), as amended by the CARES Act).
Employers planning to make tax-free student loan contributions in 2020 ought to you’ll want to have in place a written academic help program (EAP) that satisfies the necessities of Sec. 127. Employers with current EAPs could must amend their plan to cowl student loan reimbursement. Among different issues, an EAP:
Must be set forth in a separate written plan;
Must not discriminate in favor of extremely compensated staff; and
Must be sufficiently communicated to staff.
One different essential restriction is that an EAP “must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income,” within the phrases of Sec. 127(b)(4). In figuring out whether or not this requirement is met, the enterprise practices of the employer (in addition to the written program) can be taken into consideration (Regs. Sec. 1.127-2(c)(2)).
In the CARES Act, Congress acknowledged that tens of millions of Americans battle beneath the load of monumental student debt and sought to encourage employers to assist tackle the issue by creating employment profit applications. The tax break is at present set to run out after 2020, except lawmakers lengthen it.