TAX FREE Student Loan Repayment Benefits For Enterpreneurs
By: Laura Zarrate
Employers, more than ever, are on the lookout for any advantage in the struggle to entice and retain top talent. With voluntary turnover and student loan debt soaring, employers are getting more inventive with the perks they provide staff members. Through January 1, 2026, the Consolidated Appropriations Act, 2021 (CAA) contains a provision allowing employers to make tax-free payments on their employees' student loans of up to $5,250 annually. A clause that was first enacted by the CARES Act has been extended for five years. With an estimated $1.6 trillion in student loan debt, this extension enables employers to support staff members by making tax-favored student loan repayments.
STUDENT LOAN BENEFITS UNDER THE CARES ACT
Before the passage of the CARES Act, employers were unable to offer tax-favored student loan benefits. An educational assistance provision in the CARES Act, passed in March 2020, gives employers the option of paying employees or their lenders $5,250 per year to defray student loan debt expenses on a tax-free basis. In particular, Section 127 of the Internal Revenue Code (Code) was amended by the CARES Act so that payments to an employee or lender of interest and/or principal on qualified education loans made by an employer before January 1, 2021 will not be taxable to the employee. Employees could receive assistance with student loans they had already incurred. Many employers, however, were not able to implement student loan educational assistance programs due to the CARES Act, which only allowed such benefits to be offered until January 1, 2021.
REQUIREMENTS FOR EDUCATIONAL ASSISTANCE PROGRAMS
Through 2026, employers can make contributions of up to $5,250 per employee annually toward eligible education expenses, like tuition or student loan assistance, without raising the employee's gross taxable income. And that’s an extra write-off to the employer as a compensation expense! Educational assistance programs provided by employers must meet certain requirements in order to qualify for tax advantages, such as having a written plan document. Additionally, employers must treat all educational assistance payments as additional employer contributions rather than compensation for employees. Employees who are participating may not be eligible for both a loan payment and a deduction for interest paid on the debt.
You should discuss this benefit with your payroll company, and keep in mind that any amounts paid above $5,250 will be considered taxable income, and this limit includes other education-assistance payments your employees already receive (student loan repayment assistance plus other tuition assistance programs must be less than $5,250 to be tax-free). Also, most payroll systems do not track or limit your contribution to $5,250, so you'll have to track it and stop contributing at this amount or it will be considered income.