Employers try to provide a benefits package that employees appreciate and understand. Beyond the traditional offerings like 401(k), match, medical and dental, employers often try to be responsive to employees’ requests for other programs and features they would find useful (example – fertility benefits). One of the current requests employers may be hearing from their employees is request for assistance with student loan debt. Congress has been hearing those pleas, as well, and has provided employers with two potential avenues for giving relief to their employees.
The first is a modification/enhancement to the 401(k) retirement system. Employees with student loan repayments often can’t afford to make 401(k) elective deferrals, which causes them to miss out on the employer matching contributions. After several years of discussion, Congress included a provision in the SECURE 2.0 Act of 2022 permitting employers to treat employees’ student loan repayments as elective deferrals. In other words, the new law permits employers to make matching contributions to the 401(k) plan on account of dollars that the employee pays outside the plan on their student loans. This provision is effective in 2024. Even though there are some fairly significant unanswered questions (starting with how employees will verify that they have in fact made student loan repayments), employers should be hearing from their 401(k) providers about how to adopt and implement this provision, if desired.
The second is a fringe benefit that has been around for several years but has perhaps been underutilized. Code Section 127 allows for a “qualified educational assistance program” through which the employer can pay employees up to $5,250 toward “educational assistance.” The payments are tax-free to the employee. Traditionally, Section 127 was used by employers to pay employees to attend classes while employed that would enhance their careers. However, the CARES Act amended Section 127 to allow employers to treat an employee’s student loan repayments as “educational assistance”! The CARES Act relief was set to expire in 2020, but the CAA extended the provision through 2025. As a result, an employer has until 2026 to adopt a Section 127 qualified educational assistance program to reimburse employees – tax free – for up to $5,250 of student loan debt.
The IRS recently conducted a webinar to make sure employers are aware of the availability of the Section 127 qualified educational assistance program benefits. A transcript of the IRS’s presentation and slides can be viewed here.
