CARES Act Adds Student Loan Benefits for Employers and Employees

In addition to making $349 billion dollars available to employers via the Small Business Association (SBA) loans and tax credits, the CARES Act also includes provisions related to student debt. Section 2206 of the CARES Act allows employers to make contributions toward their employees’ student loans tax-free for the first time. Before the CARES Act, any contributions that an employer made toward an employee’s student loans were treated as part of their wages, making them subject to income and payroll taxes for the employer and employee.

Highlights:

• Employers can contribute up to $5,250 towards an employee’s student loans tax-free
• The tax-free status of the contributions will expire on 12/31/20
• The provision only applies to loans that are held by the employees for their own education (i.e. the funds cannot be used for loans a parent takes out in their child’s name)
• Both private and federal loans are eligible

While employer-provided assistance on student loans has been gaining traction as a fringe benefit over the past five years, it is still far from a commonplace benefit. According to a recent survey from the Society for Human Resource Managers, only 8% of employers currently provide a form of Student Loan Assistance, albeit that number is up from 4% in 2018. While few have adopted the strategy, studies show that it is a highly sought after benefit. According to a study by Abbott, roughly 90% of last year’s graduates specifically sought out employers with Student Loan Assistance programs, while 62% of employees already in the workforce indicated that they would be open to switching to an employer that offered such a benefit. Furthermore, a large portion of young adult job seekers say they would rather have money put toward student loans over 401(k) contributions or additional paid time off.

As employers search for solutions and craft strategies on how to retain top talent and continue to offer competitive benefits during these difficult times, the CARES Act’s Student Loan Repayment provisions may offer a unique opportunity.

Benefits to Employers:

• Educational assistance funds have no tax burden to you
• Possible reduction in obligation to provide an employer contribution (depending on type of contribution and whether your plan excludes non-taxable fringe benefit from its definition of compensation)
• Attract and retain top talent. A 2017 study found that 86% of young employee respondents said that they would be willing to commit to a company for 5 years if that company agreed to help pay back student loans

Benefits to Employees:

• Educational assistance funds have no tax burden to the employee
• Payment on federal student loans held by the Department of Education are suspended until 9/30. Therefore, any payments made during this time on those loans go directly to the principal. Once interest starts accruing again, it will be on a lower principal balance
• Provide relief to employees during a time of economic uncertainty
• There is no impact on the employee’s credit score and the loan payment deferral is not reported to credit agencies
• Paying directly to the principal ensures there is no violation of the “no double benefit rule,” which ensures employees are still able to deduct their student loan interest for the year when tax time comes

Many employers are acutely focused on cash flow at the moment and this offering can be beneficial in that regard as well. Some employers are offering to reduce wages and offer this option in lieu, while others have considered factoring these payments into their bonus program in various ways.

Employers interested in making this benefit available to employees should ensure that it is either offered to all employees or at least a certain class of employees.

In considering some of the finer details, the good news is, employers don’t have to go it alone. Over the past few years, several providers have emerged as leaders in the market as administrators for employer-sponsored Student Loan Assistance plans.

Many of these same providers are now set up to assist employers who are offering this benefit for the first time to take advantage of the tax breaks. If you are interested in learning more about these benefits or being introduced to a vetted provider, please reach out to your Aldrich Advisor for more information.