What Companies Need to Know for Student Loan Payments as part of the CARES Act
The Coronavirus Aid, Relief and Economic Security (CARES) Act has now extended the provision to add student loan payments as part of Tuition Reimbursement under Section 127 of the IRS Code through December 31, 2025.
This four-year extension provides a more acceptable provision, allowing Companies to build a great Retention Program knowing it will be around for a at least 4 years and, and thus attracting Candidates to join their Companies. Due to the rising debt of student loans and a political movement to help students repay their loans, there are strong indications that Congress is expected to make this temporary change permanent. Before the recent permission of the CARES Act employees and employers both were required to pay the payroll taxes on student loan paid by an employer.
The basic details of including a student loan repayment to your benefit offering is as follows:
- Section 127 of the IRS code, which deals with tuition assistance, has been expanded to add student loan repayments as an item such as tuition or books.
- Each employee under this section is allowed to have the employer pay for up to $5,250.00 each year (Companies tax year) for tuition and student loan repayment.
- The amount up to $5,250.00 is tax free to the employee.
- The employer can deduct up to $5,250.00 per employee as an expense.
- Any amount over $5,250.00 will be processed as ordinary income and the practice as well as the employee will be taxed on it.
- The Employer must adopt a written plan describing this benefit to eligible employees.
- The program cannot favor highly compensated employees.
- It is highly recommended employers pay the loan institution directly, meaning a check to the loan institution on behalf of the employee, and not paid directly to the employee. You can pay the employee directly but expect the burden of keeping and proving the loan was paid, may lead to a lot of administrative time-consuming requirements.
- Each month the employer can make their employees’ student loan repayment as a form of distribution, quarterly payments, a one-time payment each year, or another variation of this intent.
- The loan institution may be federal or private.
- Section 127 is the tuition reimbursement provision; therefore, you must offer a tuition plan with the student loan offering.
- The $5,250.00 amount is a combined total for tuition and load repayment. For example, if the employee submits a request for $1,000.00 of approved tuition expenses, then only $4,250.00 would be remaining for tax free Loan repayments.
- The tuition loan being paid must be for the employee and not a family member like a spouse or a child.
In examining the Pros and Cons to an organization adopting this as policy, there are many factors to ponder:
- CON – Can your organization afford this? After a year of dealing with COVID an employer may be overwhelmed with debt, resulting in very little profit to support paying out these benefits. If you only pay five employees, this benefit then adds up to $26,250.00 annually of your bottom line.
- PRO – You can look at the $26K and say that it costs more to have one turnover in a year, and perhaps if you retain two professional employees you actually become more profitable.
- CON – To implement the Student loan program you will need to follow Section 127 and offer a Tuition Reimbursement as part of the program.
- CON – The employer must administer the program and may need outside help implementing this to meet compliance.
- PRO – For employees this is a phenomenal tax-free benefit.
- PRO – Retention of employees by providing benefits which have value to them.
- CON – A somewhat long-term commitment for the employer, which typically has low participation.
- PRO- Employers can set a limit on reimbursement. The $5,250.00 is a maximum amount for the tax-free deduction. An employer can set any amount below that figure as the maximum amount they will pay for this benefit.
- CON – For tuition Reimbursement the employee must provide original receipts for all items requesting reimbursement.
There are many considerations in setting up a Tuition& Student re-payment Program. According to SHRM, currently approximately only 8% of employers are providing post-tax dollar benefits to their employees. First the employer must review their Employee Handbook to see if they have clearly communicated the Tuition Reimbursement Policy. Then if they do, the existing plan needs to be revised to add the student loan repayment details. Flex HR has produced a sample policy that serves as a guide for you to write your own policy. If you would like this sample, please contact us at info@FlexHR.com for your copy. It is NOT recommended that you just fill in the blanks of this policy in order to meet the compliance and minimum standards of Section 127 IRS code, but refer to this as a guide.
To properly implement this policy, you need to ask yourself these questions and decide on the following items:
- Does it meet the employer’s strategic objectives?
- Have you built an effective communication strategy as required by the code?
- Did you establish the type of education the employer will pay for under this program?
- What is the maximum dollar limit the employer is willing to contribute to this plan?
- Where will you publish this policy? It is recommended you publish it in your handbook and have all employees sign the handbook.
- Who will manage the program?
- What training is needed if you will manage this policy in-house?
- Have you taken measures to ensure you are not discriminating to keep the parameters for reimbursement as your plan is written?
- Who will develop the forms requested? Who will keep copies of support documents?
- What method will be used to pay the student loan?
- Will the student loan payment apply to specific related training like the tuition, or will loans be part of obtaining knowledge and education to perform specific company industry services?
- Will you require a grade level to pay tuition? i.e., must at least get a “B”. Or a “C” will pay 50%, a “B” will pay 75% and an “A” 100%.
- What pre-approvals are required before the employee commits to applying for courses or going into student loan debt?
- If paid over the $5,250.00, what is the procedure for adding as income to the employee’s W-2 as ordinary income?
- Will you continue paying Loan repayments if the employee is on leave of absence?
Once you gather all the parameters that you would like to incorporate into your policy to meet your strategic goals, you will be ready to get a draft policy completed.
You may ask what the difference is between Tuition & Student Loans Reimbursement and paying for some continuing education credits, seminars, license fees and other training. Please refer to your CPA; however, section 132 of the IRS code provides for tax free benefits to the employee for these benefits. You will need a separate policy to support this benefit.
It is suggested you have a short policy for these two benefits in your Employee Handbook. You need to support these benefits with a complete written administration guide that is available for handing out to an employee outlining the full details of the program. Flex HR is available to help you with these policies and procedures.
Founder & CHRO
Flex HR, Inc. is among the top HR outsourcing and consulting firms, based out of the Atlanta, GA area. They were selected Best of Johns Creek Award in the Business Human Resources Consultant category by the Johns Creek Award Program last year, and this year was inducted into the Johns Creek Business Hall of Fame. The Atlanta Journal-Constitution awarded Flex HR “Best of Atlanta Business Profiles” while Outsourcing Gazette magazine listed Flex HR as the “Top Most Promising HR & Staffing Service Vendors.” For 3 years INC Magazine recognized Flex HR as an Inc 5000 “Fastest Growing Privately Held Companies in America”. Jim was also recognized by the North Fulton Chamber of Commerce as the “Small Businessperson of the Year.” Catalyst Magazine acknowledged Flex HR as 1 of 18 Companies CEO’s in Atlanta would like to own.
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