Prior to the recently-passed CARES Act, employer student loan help was handled as wages. Thus, staff needed to pay revenue taxes and employers had been required to pay payroll taxes on any student loan help paid to staff.
But, whereas it hasn’t gotten as a lot consideration because the reduction stimulus checks, the CARES Act has quickly made employer student loan help funds tax-free by the top of 2020. And then, when Trump signed the Covid-19 reduction on the finish of December 2020, it prolonged this profit by 2025.
That’s a giant incentive for each the employer and staff to reap the benefits of these applications. In this text, we’ll take a look at the employer student loan help program earlier than the CARES Act and the way it has quickly modified.
How Employer Student Loan Assistance Programs Usually Work
Student loan reimbursement help applications (LRAPs) enable firms to make month-to-month funds on to an worker’s student loan lender. The loans will be both federal or personal.
These applications have been round for a couple of years and have been slowly gaining traction. The upside for employers is that it’s one other software to entice prime expertise.
A 2019 survey by the Society for Human Resource Management (SHRM) discovered that 8% of employers supplied student loan reimbursement help in 2019, which was up from 4% in 2018 and three% in 2015. See the record we have compiled of firms that supply student loan help.
The necessary factor to level is that employer student loan help is often will increase an worker’s tax invoice. Basically, it’s extra wages and elevates the worker’s total taxable revenue.
Interestingly, tuition reimbursement applications obtain higher tax therapy from the federal authorities. Currently, firms may give staff as much as $5,250 of tax-free tuition reimbursement funds per yr. Learn extra about tuition reimbursement plans.
How the CARES Act Impacts Employer Student Loan Assistance Programs
With the brand new Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a brief tax-free provision is supplied for employer student loan help applications.
Section 2206 of the CARES Act permits a portion of student loan funds to be excluded from revenue. Whether these funds are made on to the worker or the lender, they are going to be tax-free. The revenue exclusion is as much as $5,250 per yr per worker.
This new provision advantages each the worker and employer. The worker will get to keep away from paying revenue tax on the student loan funds, whereas the employer will get a payroll tax exclusion.
How Long Does This Tax Benefit Last?
For now, these tax adjustments are solely set to stay in impact till December 31, 2025. So to reap the benefits of these incentives, folks might want to begin going again to work this summer season. This tax incentive is mainly rendered ineffective whilst you’re unemployed (and over 30 million folks presently are).
But it is necessary to level out that the CARES Act has additionally quickly suspended funds and curiosity on federal student loans. The pause on funds will stay in impact till January 31, 2021.
Federal student loan debtors can reap the benefits of the pause in funds till September once they’ll hopefully be ready to benefit of the tax-free employer student loan help from October – December.
Unfortunately, personal student loan debtors don’t qualify for the CARES Act 6-month fee pause. So if in case you have personal student loans, it will be in your finest curiosity to start taking part in your organization’s LRAP program as quickly as doable.
Can You Combine Tax-Free Employer Loan Assistance With Tuition Reimbursement?
Yes and no. The CARES Act provision modifies the present Section 127, which allows an employer to pay as much as $5,250 of an worker’s certified instructional bills with the fee being tax-free to the worker.
This is now a mixed restrict. Thus, an employer might pay $3,000 in the direction of an worker’s Master’s diploma and one other $4,000 of the identical worker’s student loan funds in 202. But the utmost quantity that shall be tax-free to the worker is $5,250.
Also, you can not deduct the curiosity on student loans to the extent that it’s paid on a tax-free foundation by both of those applications. Learn extra concerning the student loan curiosity deduction.
How Can You Qualify?
If you wish to reap the benefits of this program, your employer wants a Section 127 program created. If you are self employed, you’d must create a Section 127 program on your personal enterprise.
This is not terribly arduous, and there are firms that may assist. However, it’s an added expense and firms could not wish to supply it or create the required program.
There’s rather a lot to like concerning the CARES Act tax-free employer student loan help provision. First, it might encourage extra employers to undertake these applications as a part of their new-hire package deal.
However, that is but to be seen, as a result of it is nonetheless an added expense to employer’s backside line. And when nearly 1-in-5 Americans is out of labor, employers do not normally should put collectively aggressive compensation packages.
Second (and, maybe, extra importantly) this may very well be step one in the direction of Congress voting to move the Employer Participation in Repayment Act, which requires LRAP funds to turn out to be completely tax-free.