QUESTION: Many of our company’s employees have student loans. Could we help them repay those loans on a tax-advantaged basis using a qualified educational assistance program?
ANSWER: Educational assistance programs under Code § 127 currently can be used to help employees repay certain student loans, but this benefit is only available for a limited time and there are other restrictions. Here are some things to consider.
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Expiration Date. The loan repayment provision will expire at the end of 2025, unless Congress extends it.
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Qualifying Loans. Loan repayment benefits can be used to pay principal or interest (or both) on any qualified education loan incurred by an employee for the employee’s education. For this purpose, the term “qualified education loan” has the same meaning as it has for the federal income tax deduction on education loan interest, which covers most loans for students who are enrolled at least half-time in a degree program at an accredited post-secondary institution. For more on which loans qualify, see IRS Publication 970.
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Method of Payment. Employers may choose to pay the lender directly or reimburse the employee. Direct payments may offer greater assurance that the funds are being properly used. Employers offering reimbursements will want to adopt substantiation procedures that reasonably assure qualifying loan payments were made.
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Program Scope. After 2025, Code § 127 will remain in effect, but it will only apply to payments for tuition, fees, books, and certain other expenses, and education provided directly to employees—i.e., education provided “in-kind.” Employers are generally free to impose limits on the benefits offered, so your company could decide to limit its program to loan repayments under the loan repayment provision (while it is in effect), or you could provide the other benefits that are permitted both before and after 2025.
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Amount Limitation. Student loan payment assistance will be combined with any other educational assistance when applying the $5,250 aggregate annual limit on educational assistance benefits. Consequently, payments for any other types of educational assistance your company decides to offer will reduce the nontaxable amount available to your employees for student loan repayments.
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Nondiscrimination. If your company does not make the same benefits available to all employees, it will need to demonstrate that benefit eligibility does not discriminate in favor of highly compensated employees. Whether or not all employees can participate equally, your program will need to limit benefits so that not more than 5% of the benefits paid during a year are paid to more-than-5% owners.
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Documentation. Qualified educational assistance programs must be in writing, so if you don’t have a qualified educational assistance program, you will need to prepare and adopt a written program document describing the new benefit. If you have a program, you will need to amend it to add student loan repayment benefits unless the program already authorizes any type of educational assistance within the meaning of Code § 127.
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Notification. Eligible employees must be given reasonable notification of the program’s availability and terms.
For more information, see EBIA’s Fringe Benefits manual at Section X (“Qualified Educational Assistance Programs”).
Contributing Editors: EBIA Staff.
