CARES Act Makes Employer-Paid Student Loan Repayment Assistance Tax-Free
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a temporary provision that provides tax-free status to employer-paid student loan repayment assistance programs (LRAPs).
Section 2206 of the compromise version of the CARES Act provides an exclusion from income for employer-paid student loan repayment assistance, but only through the end of 2020.
Payments of principal and/or interest by the employer to the employee or to the lender will be tax-free.
The tax-free status is implemented by expanding the definition of educational assistance in the exclusion from income for up to $5,250 in employer-paid educational assistance [26 USC 127].
Thus, employers may provide each employee with up to $5,250 a year in combined tuition and textbook assistance and student loan repayment assistance, tax-free. Most employer LRAPs provide employees with $100 per month in student loan repayment assistance, or $1,200 a year.
Borrowers can’t claim the student loan interest deduction based on a tax-free payment of student loan interest from their employer. But, employers can target their student loan repayment assistance just to principal, letting the employee pay the interest, thereby working around the “no double benefit” coordination restriction.
According to the Society for Human Resource Management (SHRM), 8% of employers currently offer LRAPs. An additional quarter (24%) of employers are waiting for LRAPs to have tax-free status before they offer them to their employees. LRAPs are good employee recruiting and retention tools.
If enough employers offer LRAPs to their employees, there will be a lot of pressure on Congress to permanently extend the tax-free status of LRAPs beyond the January 1, 2021 expiration.
Chicago-based Abbott Labs allows employees to direct the 2% minimum they’d make to their company 401(k) plan into their student debt repayment plan. In turn, the employee would earn a 5% company match to be used as a 401(k) plan contribution.