The Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, provides employers with a new mechanism to assist their employees with repayment of student loans. Section 2206 of the CARES Act amends Section 127 of the Internal Revenue Code (the “Code”) to allow employers to pay up to $5,250 toward qualified education loans as part of an educational assistance program as long as the payments are made before January 1, 2021. Employers can make payments either directly to the employee or to a lender.
Section 127 provides that amounts paid or expenses incurred by employers under an educational assistance program for the educational assistance of employees are not included in the employee’s gross income, provided that the program satisfies the following requirements:
- The program must be a separate written plan of the employer for the exclusive benefit of its employees to provide such employees with educational assistance. Notably, the CARES Act does not provide an exception to this rule, so employers might consider adopting a written educational assistance plan or amending their existing written educational assistance plan to incorporate this student loan payment benefit before taking advantage of Section 2206.
- The program must benefit employees who qualify under a classification set up by the employer that is not discriminatory in favor of highly compensated employees.
- No more than 5% of amounts paid by the employer for educational assistance during the year can be provided for individuals who own more than 5% of the stock or capital profits interest in the employer.
- The program cannot provide eligible employees with a choice between educational assistance and other remuneration includable in gross income.
- Reasonable notification of the availability and terms of the program must be provided to eligible employees.
The educational assistance program does not need to be funded. Notably, Section 127 permits payments for student loans incurred by the employee, not the employee’s family. Additionally, Section 127 permits a maximum exclusion of $5,250 for all employer payments and expenses under educational assistance programs. Accordingly, maximum employer student loan payments are limited to the extent that the employer makes payments for other qualified expenses under Section 127 such as tuition, fees, books, and equipment for employee education.
Many employers are seeking to assist their employees in the wake of the COVID-19 pandemic, so now might be a good time to consider taking advantage of this temporary opportunity to assist with student loan repayments.