Expertise Beyond the Numbers

How the CARES Act Changes Student Loan Benefits Under IRC Section 127

The CARES Act, signed into law on March 27, 2020, includes some lesser known sections. One such provision is an allowance for employers to help employees make student loan payments.

SC&H’s Key Takeaways:

  • Allows employers to subsidize and / or reimburse employee student loan payments
  • Up to an annual maximum of $5,250 per employee
  • Tax deductible for employers, and excluded from taxable income for employees
  • Should be coordinated with traditional / existing tuition reimbursement plans

Like many of the provisions included in the CARES act, this one is an expansion and liberalization of an existing program / law.

Internal Revenue Code (IRC) Section 127 sets out the rules for Educational Assistance Programs including tuition reimbursement programs. Section 2206 of the CARES act amends IRC section 127 to include payments of principal or interest on qualified education loans to the definition of acceptable “educational assistance”.

Qualifying payments may be paid to the employee or directly to the student loan lender / servicer prior to January 1, 2021.

Because this change is definitional with respect to the structure of IRC section 127, the existing rules related to section 127 remain in place. Some notable rules include:

  • The employer must have a separate written plan for the educational assistance benefits
  • The maximum annual exclusion for education assistance is $5,250 per employee
  • Educational Assistance payments are not included in the income of the employee
  • Employees may not be offered the choice between educational assistance and taxable compensation
  • The student loan being paid must be that of the employee, not of their child or spouse
  • The payments made be for principal or interest, but employees cannot deduct interest paid by employers. Employers may want to designate that payments are for principal to achieve maximum tax benefits for employees

Employers may want to review existing policies to ensure they reflect the updated definitions for section 127 Educational Assistance plans. In addition, there are some employers already providing student loan payment assistance to employees who can now convert this to a pre-tax benefit, saving the employee income taxes, while saving the business some payroll tax expense.

If you have any questions on how these changes apply to your organization, please reach out to our team today.