By Heather Garbers
Student loans represent the second largest form of consumer debt in the United States — second only to mortgage debt, even outpacing credit card debt and auto loans. The $1.7 trillion in outstanding student loan debt is currently held by 42.9 million Americans with an average balance of $30,062 owed.
The multiple COVID-19 relief packages have attempted to help reduce this student loan debt. The CARES Act in 2020 expanded Section 127 tax code provisions for educational assistance to allow employers to also make contributions towards their employees’ student loan debt up to the $5,250 annual max, without including the company contributions in the employee’s gross income (making them tax free).
This provision was originally scheduled to expire on December 31, 2020, when H.R. 133, the Consolidated Appropriations Act, was signed into law on December 27, 2020, extending the tax exemption for five years, until December 31, 2025.
The expanded tax code provisions include employer contributions to their employees’ student loan debt payments as a pre-tax benefit, up to a maximum limit of $5,250 per year. Previously, such employer contributions were considered taxable income. The $5,250 combined limit is for total student loan repayments and other educational assistance, such as paying for tuition reimbursement or direct employee education.
It is projected that the changes will save employees up to 30% on state and federal income taxes, with variations based on individual tax rates and whether student loan interest was deductible. Employers may save up to 10% in federal and state taxes (varying according to state tax rates) and it could also help employers’ recruitment, retention and employee wellbeing efforts.
Reducing student loan debt to improve your pool of talent
This provision creates a powerful tool for recruitment and retention. Studies have indicated a large majority of employees between the ages of 21 and 36 would commit to an employer for five years in exchange for assistance in paying off their student loans. As a result, forward-looking employers with employee student loan debt repayment programs have an advantage in attracting and retaining top talent.
In addition, there’s a correlation between employees’ reduced financial burden and higher rates of presenteeism, decreased rates of absenteeism, and reduced healthcare costs. Helping employees reduce student debt can go a long way in improving their financial wellness and overall wellbeing.
While student loan services are a relatively new benefit, there many vendors can customize a program that best fits an organization’s needs. Services vary from services for loan consolidation and refinancing, guidance and advice on how to manage your debt, resources to view and manage all loans in one place, and those that can administer employer and employee contributions towards student loan debt.
The rules of the Section 127 road
In adopting a written Section 127 plan or amending their existing plan, employers can make student loan repayment programs an even more enticing employee benefit with tax free contributions. Any qualified education loan is eligible, as long as it’s incurred by an employee for his or her education.
Employers should be mindful of compliance considerations as they proceed:
- Structuring contribution rates can be based on employee class such as full-time, part-time, or temporary workers. The benefit cannot be offered only to highly compensated employees (as defined by IRS rules) or those with more than 5% ownership in the company under Section 127 provisions.
- Each employee class should be nondiscriminatory, as set out by IRS rules; qualified administrators of Section 127 plans should be consulted for guidance.
Companies are looking for savings wherever they can be found while still offering attractive and innovative benefits to current and prospective employees. The changes to the tax code in the stimulus bills over the past year create an added impetus for student loan programs.
Contact a HUB Employee Benefits expert to learn more about how your organization can take advantage of the new CARES ACT student loan employer contribution & repayment tax structure.