A Closer Look: Employer-Provided Student Loan Repayments

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Section 2206 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, expands tax-free education assistance programs that employers may offer their employees to include student loan repayments. This allows employers to provide a tax-free student loan repayment benefit of up to $5,250 in 2020. This provision is only effective from March 27, 2020 through December 31, 2020.

Education Assistance Programs

Education assistance programs are permitted under IRC § 127. They allow employers to provide tax-free education assistance to their employees in amounts of up to $5,250 per year. To meet the requirements of IRC § 127, the program must be set forth in writing, communicated to all eligible employees, and offered to employees on a basis that does not discriminate in favor of highly compensated employees. Employees eligible for the program cannot be given a choice between receiving the educational assistance benefits or taxable compensation.

Prior to the CARES Act, “educational assistance” was defined to include payment of expenses incurred by the employee for education of the employee, such as tuition, fees, books, and supplies. The CARES Act temporarily expands the definition of educational assistance to include payments on the principal or interest of any qualified student loan debt incurred by the employee for the education of the employee. This includes student loan debt incurred by the employee for his or her own higher education expenses, but does not include any student debt incurred by the employee related to the education of a spouse or dependent.
   
An employer that offers an education assistance program may make student loan repayments to the employee or directly to the lender. These payments are excluded from the gross income of the employee, provided all educational assistance benefits do not exceed $5,250. Student loan repayments after 2020 are not eligible to be covered.

Federal Student Debt Payment Relief

Apart from the benefits provided under education assistance programs, Section 3513 of the CARES Act temporarily suspends payments on federal student loans through September 30, 2020. The provision also suspends accrual of interest on such loans during this period. Federal student loan borrowers may continue to make payments on principal during the suspension, but it is not required. Importantly, borrowers do not need to make payments during this period to continue to qualify under existing loan forgiveness programs or loan rehabilitation programs. For purposes of these programs, the loan payments will be treated as if they are made each month. Additionally, loan payments will be treated as if they are made each month for purposes of reporting loan information to a consumer reporting agency. Lastly, all collection efforts related to federal student loan debts are suspended through September 30, 2020. This means that wage garnishments and reductions to tax refunds and Social Security benefits on account of defaulted loans will be suspended for this period.

Employer Considerations

Employers may adopt education assistance programs to provide this benefit to employees. Employers that already offer education assistance programs may revise them to include student loan repayments through December 31, 2020. While payments on federal student loans will not be required through September 30, 2020, the federal relief does not apply to private student loans and does not result in loan forgiveness (for those not enrolled in loan forgiveness programs). Therefore, assistance with continued payments may help employees who are financially impacted by COVID-19 stay on track with their loan repayment schedule.

For more information about the employee benefit implications of the COVID-19 pandemic and how they might affect your employee benefit plans, please contact any one of Ice Miller's Employee Benefits attorneys. Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.