If you have employees with student loans, there is an often overlooked benefit included in the CARES Act. Employers can contribute up to $5250.00 per year toward an employee’s student loans and it will not count as taxable income to the employee. This is a great benefit in two ways; it stretches the impact of your employee benefit dollars, and it increases the amount of untaxed money paid toward student loans (standard repayment only allows deducting interest). If you are hiring former students with outstanding loans, this benefit is a great recruitment tool. Note that currently, this benefit expires in 2026.
See the full IRS Guide here: https://www.irs.gov/publications/p15b#en_US_2021_publink100060505
Below is an excerpt from the IRS’ technical bulletin. It’s complicated, and intended for your financial professional, so don’t be put off if it seems overwhelming. If you are interested in this program, discuss it with your accountant or bookkeeper on how to make payments on behalf of your employees.
Educational Assistance
This exclusion applies to educational assistance you provide to employees under an educational assistance program. The exclusion also applies to graduate-level courses.
Educational assistance means amounts you pay or incur for your employees’ education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses don’t include the cost of a course or other education involving sports, games, or hobbies, unless the education:
- Has a reasonable relationship to your business, or
- Is required as part of a degree program.
Education expenses don’t include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation. Your employee must be able to provide substantiation to you that the educational assistance provided was used for qualifying education expenses.
Exclusion for employer payments of student loans. Section 2206 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), expands the definition of educational assistance to include certain employer payments of student loans paid after March 27, 2020. The exclusion applies to the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for the employee’s education. Qualified education loans are defined in chapter 11 of Pub. 970. This exclusion expires January 1, 2026, unless extended by future legislation.
Educational assistance program. An educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only if all of the following tests are met.
- The program benefits employees who qualify under rules set up by you that don’t favor highly compensated employees. To determine whether your program meets this test, don’t consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
- The program doesn’t provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
- The program doesn’t allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
- You give reasonable notice of the program to eligible employees.
Your program can cover former employees if their employment is the reason for the coverage. For this exclusion, a highly compensated employee for 2021 is an employee who meets either of the following tests.
- The employee was a 5% owner at any time during the year or the preceding year.
- The employee received more than $130,000 in pay for the preceding year.
You can choose to ignore test (2) if the employee wasn’t also in the top 20% of employees when ranked by pay for the preceding year.
Employee. For this exclusion, treat the following individuals as employees.
- A current employee.
- A former employee who retired, left on disability, or was laid off.
- A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
- Yourself (if you’re a sole proprietor).
- A partner who performs services for a partnership.
Exclusion from wages. You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee’s wages each year.
Assistance over $5,250. If you don’t have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Working condition benefits may be excluded from wages. Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been allowable as a business or depreciation expense. See Working Condition Benefits, later in this section.