Employers are keenly aware of the heavy burden placed on their employees by student debt, which remains at an all-time high. In a poll conducted from late last year to early this year (pre-COVID), 41% of employers reported they were offering financial wellness benefits in response to the student loan debt problem their employees faced.1 Among those benefits, the most direct form of assistance, Student Loan Repayment (SLR), ranked third.2 Although the number of employers who offer it has doubled since 2018,3 they still comprise only about eight percent of all organizations.4 If SLR is so important, why hasn’t it caught on faster? The chief reason, it seems, is that, unlike tuition reimbursement, traditional SLR benefits are taxable to both the employee and the employer. But you might have options.
Converting 401k contributions to loan repayment
Since 2018, one workaround solution has been for employers to make 401k contributions to employees in lieu of direct loan repayment contributions, effectively freeing up employees to pay loans without having to abandon retirement savings.
Converting PTO to loan repayment
Another fairly recent innovation—and one that addresses a particular challenge of the pandemic—is converting the value of unused Paid Time Off (PTO) to loan relief. As we noted in a recent post, Donating PTO Helps Fellow Employees in Times of Need and Creates Community Goodwill, unused PTO has been on the rise for some time, and has increased dramatically this year due to the effects of COVID-related vacation cancelations and travel restrictions. Letting employees convert some of their excess PTO value to loan relief can be an attractive alternative to carrying over large amounts of PTO into the new year or enforcing a use-it-or-lose-it rule.
Both of these options are more appealing than going without a SLR benefit altogether. But neither gives the company or the employee the advantage of direct loan repayment on a tax-free basis. That’s why you might want to consider taking advantage of the limited-time tax-favored status granted to SLRs by the CARES Act.
Tax-favored contributions through the CARES Act
The CARES Act was signed into law in March 2020 to provide financial relief to Americans struggling financially due to the pandemic, and includes special provisions for student loan repayment assistance. Section 2206 of the Act expands the tax code to allow employers to do something they haven’t been able to do previously: reimburse employees up to $5,250 for qualifying student loan repayments as tax-free income. (The same limit applies if they elect to combine loan repayment with tuition assistance.) Keep in mind you will need to establish a Section 127 Educational Assistance program. The plan you establish in writing should detail the benefit, the terms, and eligibility. Also note that the money is for employees only, and cannot be applied to loan debt of a spouse or dependent.
At this point, the future of a tax-favored SLR benefit beyond the end of 2020 is uncertain. There’s a possibility Congress will continue it into 2021 or perhaps renew it after a lapse. (There’s also momentum for granting SLRs regular tax favored status, as in the case of tuition reimbursement.) What’s certain is that you have until December 31, 2020 at the earliest to take advantage of the current opportunity.
An end-of-year tax advantaged SLR benefit can go a long way towards helping your employees with educational loan debt and recharging morale. But you’ll need to act quickly to meet the current end date.
Editor’s Note: TASC offers a Student Loan Reimbursement Account, which can be configured to reimburse expenses that align with the CARES Act. Implementing prior to Dec. 31, 2020 is achievable; once we receive your Purchaser Details, we can set up the account within 3 business days. https://www.tasclargemarkets.com/endless-aisle
- “Converting PTO Funds to Student Loan Relief Is a Timely Benefit,” SHRM, August 2020: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/converting-pto-funds-to-student-loan-relief-is-a-timely-benefit.aspx
- “How the CARES ACT Changes Health, Retirement and Student Loan Benefits,” SHRM, March 2020: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/how-the-cares-act-changes-health-retirement-and-student-loan-benefits.aspx