A new rule under the CARES Act could benefit employees with unpaid student loan debt, and even save employers money. The CARES Act broadened the scope of educational assistance programs under section 127 of the code to include student loan repayments. Under the previous law, this provision only allowed the exclusion from an employee’s income of educational assistance provided prospectively by an employer. As a result of this change, an employer can now repay up to $ 5,250 on an employee’s student loans, and those repayments would not be subject to income tax or payroll for 2020.
Requirements for educational assistance plans under section 127 of the Code
To take advantage of this new rule, an employer will have to adopt a section 127 educational assistance plan. While there is great flexibility in how an employer can structure such a plan, there is also certain limits. First, to be considered an educational assistance program, an employer must provide reasonable notice of the availability and terms of the program to all eligible employees. Program eligibility requirements must not discriminate in favor of highly paid employees or their dependents. In addition, no more than five percent of the amounts paid by the employer for educational assistance can be provided to shareholders and owners who own more than five percent of the shares or capital, or interest on profits. in the employer.
Another critical limitation of a section 127 program is that the program must not offer eligible employees a choice between educational assistance and other remuneration included in gross income. Therefore, an employee cannot choose either the regular salary or the payment by the employer of educational assistance and loan repayments. This means that such a program will only benefit those who have outstanding student loans. An employee who does not have an outstanding student loan cannot receive additional compensation because they choose to “opt out” of an employer’s student loan repayment program.
A plan under section 127 must be maintained in accordance with a separate written plan document. For employers who already have such a plan in place, the plan will need to be amended to reflect the expanded scope of educational assistance available. The Section 127 plan can be structured to limit educational assistance to only certain forms (for example, only student loan repayment) and to certain categories of employees. The program can benefit ordinary employees as well as self-employed workers, such as partners in a partnership.
Significant tax savings for affected employees, as well as savings for employers
This new change to the tax-free education assistance rules could provide a significant benefit to employees with unpaid student loan debt. Assuming that an employee receives the full $ 5,250 in student loan repayments, this could result in additional after-tax income of over $ 1,800 for these recipients, assuming a marginal state of 35% + a rate d. federal taxation + FICA. In addition, by avoiding the employer’s share of FCIA on these payments, the employer would also recognize the savings.
This new program is one of many programs that could offer employers tax savings, credits or similar benefits that have been put in place in response to the COVID-19 crisis.