When the Consolidated Appropriations Act (“CAA”), 2021, was enacted by Donald Trump on December 27, 2020, it significantly opened the door for employers to help employees with student loan debt. The CAA allowed employers to pay up to $ 5,250 per employee per year in loan repayment assistance. A similar provision was previously included in the CARES Act, but it expired on December 31, 2020. With the short duration, few employers took advantage of the program. The newly enacted legislation remains in force until the end of 2025, with the possibility of being renewed afterwards.
The CAA amended Section 127 of the Internal Revenue Code to broaden the definition of “qualifying education expenses.” Previously, employers could make tax-free contributions for an employee’s tuition, fees, and books without increasing the employee’s gross taxable income. Now this term has been broadened to include loan repayment assistance. CAA has not changed the previous limit of $ 5,250 for contributions.
Loans do not need to be tied to the employee’s employment with the employer and may have been taken out prior to the employment relationship. These employer contributions do not increase the gross taxable income of the employee and are exempt from tax for the employer. While these contributions do not affect an employee’s gross taxable income at the federal level, you should consult a tax professional to determine if the states offer a similar benefit.
Employers wishing to offer this benefit to employees must develop an educational assistance program. Among other requirements, the program must be written and comply with Section 127 of the IRS Code. The program should:
- Do not discriminate in favor of highly paid employees (in 2021, a highly paid employee is one who receives remuneration above $ 130,000), that is, he should be available for most of the employees in your business ;
- No more than 5 per cent of the amounts paid by the employer may be intended for persons who are shareholders or owners;
- Employers cannot offer employees a choice between educational assistance and other compensation (that is, they cannot accept a pay cut in order to receive it); and
- Employees must be notified within a reasonable time of the availability and terms of the program.
With the five-year duration of the program, more employers are likely to benefit from this program. Not only does it tackle the student loan crisis, it’s an attractive recruitment and retention tool for employers.