Section 2206 of the CARES Act allowed an exclusion of as much as $5,250 from an worker’s gross earnings, if an employer paid principal or curiosity on an worker’s “Qualified Education Loan”.
Section 2206 of the CARES Act was solely designed to be in impact for calendar yr 2020. However, The Consolidated Appropriations Act, 2021 (the “CAA”) extends this provision of the regulation by December 31, 2025.
This provision of the CAA is in Section 120 of Division EE, known as “The Taxpayer Certainty and Disaster Tax Relief Act of 2020”.
It doesn’t seem that in 2020, many employers determined to offer student loan forgiveness as an worker profit. Given the pandemic, that’s actually comprehensible. However, going ahead, it is perhaps one thing that employers would possibly discover extra enticing as a recruiting or retention device. Thus, the next is a quick refresher on this profit.
Code Section 127 – Education Assistance Programs
Internal Revenue Code (the “Code”) Section 127 has for a really very long time, supplied an exclusion from an worker’s gross earnings for reimbursement supplied to the worker beneath an employer’s “educational assistance program”. The most quantity of tax-free reimbursement is $5,250 per calendar yr.
The worker’s schooling beneath this system could also be reimbursed with out regard as to whether it pertains to the worker’s employment. However, the academic bills can not pertain to a sport, recreation or passion.
The CARES Act
Section 2206 of the CARES Act amended Code Section 127 to permit an employer to pay for all or a part of an worker’s “Qualified Education Loan” as a tax-free profit, supplied that profit is supplied as a part of an employer’s schooling help program.
An vital level to notice is that the worker wouldn’t have needed to incur the academic bills whereas that individual was an worker of the employer.
For instance, an current worker with student loan money owed that had been incurred previous to be being employed, can have that debt forgiven beneath the plan. Likewise, a newly employed worker with pre-existing student loan debt may also have that debt forgiven beneath the plan.
Code Section 127 – Employer Plan Requirements
Under Code Section 127, the employer should set up a written plan and talk the phrases of that plan to eligible staff. In addition, the Plan should fulfill the next necessities:
The phrases of the Plan can not discriminate in favor of extremely compensated staff (“HCEs”).
For this objective, Code Section 414(q) is referenced. In 2021, an worker is an HCE if she or he had compensation of greater than $130,000 in 2020. 5% house owners of companies are additionally thought of to be HCEs.
Collectively bargained staff should be thought of in figuring out nondiscrimination eligibility necessities, until academic help advantages had been the topic of fine religion bargaining.
Controlled group guidelines apply for testing nondiscrimination.
The calendar yr $5,250 most exclusion for loan forgiveness should be mixed with another academic help that’s supplied to the worker beneath the employer’s Code Section 127 plan for that calendar yr.
The plan can not allow an worker to decide on between taxable compensation and advantages and the academic help. Thus, an worker can not elect wage discount as a way of collaborating within the Section 127 plan. Simply put, the advantages beneath the plan should be employer paid advantages.
Qualified Education Loans
The guidelines that outline what’s going to qualify as a “Qualified Education Loan” are considerably advanced. The IRS advises taxpayers to overview Chapter 4 of IRS Publication 970.
However, on the whole, the loan needed to be incurred for the worker’s prices of attendance (i) in pursuit of a level, certificates, or different program that might result in a “recognized educational credential”, and (ii) whereas carrying a course load not less than one-half (1/2) of the conventional course load for that individual course of examine.
Loans from the federal government or a monetary establishment are fantastic. Loans from members of the family don’t qualify. Loans from tax-qualified employer retirement plans (e.g. 401(okay) Plans) don’t qualify.
Attendance at an “eligible education institution” is required. In normal, it will embody all faculties, universities, vocational colleges and different post-secondary establishments which can be eligible to take part within the federal student assist program.
Costs of attendance on the eligible schooling establishment embody tuition and costs, books, provides, transportation, miscellaneous private bills, room and board and varied different prices.
© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 12