The CARES Act gives employers a way to pay employees' student loan debt on a pre-tax basis during a portion of 2020 through an educational assistance program under Section 127 of the Internal Revenue Code ("Code").
Overview of an Educational Assistance Program
Under a Section 127 educational assistance program, an employer may pay or reimburse an employee on a pre-tax basis for up to $5,250 annually for tuition, fees, books, supplies and equipment for undergraduate or graduate courses. The courses are not required to be job-related, although many employers require that reimbursable courses must be job-related. The program may not pay for tools or supplies that may be retained by the employee after completion of a course; meals, lodging or transportation; or courses involving sports, games or hobbies (unless such courses involve the employer's business or are required as part of the degree program.) If desired, the employer can require that employees complete the course or attain a particular grade prior to making reimbursement.
An educational assistance program must meet the following additional requirements under Code Section 127:
- The program must be in writing.
- An employer must give eligible employees reasonable notification of the program.
- The program must benefit a classification of employees that does not discriminate in favor of highly compensated employees (as defined in Code Section 414(q)).
- No more than 5% of the amounts paid by the employer under the program may be provided to 5% owners or their spouses or dependents.
- The program must not provide eligible employees with a choice between educational assistance and taxable compensation. Therefore, it cannot be included as an optional benefit in a Section 125 cafeteria plan.
CARES Act Expansion
The CARES Act provides that an employer may include, as a benefit under its educational assistance program, the payment of principal or interest on any qualified education loan incurred by an employee for the employee's education. This special rule applies to payments made after March 27, 2020 and before January 1, 2021.
Any payments for student loan debt would count against the $5,250 annual benefit under the educational assistance program. To implement this feature, an employer should amend its educational assistance program, or adopt a program, and notify employees of the availability of the new benefit. The employer should also create appropriate forms and processes under which employees may submit a request for reimbursement and coordinate with its payroll provider to ensure that any payment are treated as non-taxable payments.
This post is a part of the All Things HR Blog's multi-part series on frequent issues and questions faced by employers during the COVID-19 crisis.
Originally published 29 April, 2020
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