On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which addresses the public economic and health crisis related to the 2019 novel coronavirus (COVID-19). The CARES Act includes a temporary provision that allows employers to make tax-free student loan payments on behalf of employees pursuant to a qualifying educational assistance program maintained by the employer under Internal Revenue Code (Code) Section 127.
To qualify for tax-free treatment, the student loan payment must satisfy the following conditions:
- The payment must be made after March 27, 2020 and before January 1, 2021.
- The amount of the payment may not exceed $5,250. The $5,250 limit is reduced by any other educational assistance provided to the employee under the employer’s educational assistance program during the year (such as reimbursement of current tuition).
- The payment must be issued to pay principal or interest on a qualified education loan (as defined in Code Section 221(d)(1)) incurred by the employee for his or her education. In general, a qualified education loan is any indebtedness incurred by the employee to pay qualified higher education expenses which are attributable to education furnished during a period in which the employee was an eligible student (at least half-time at an eligible educational institution).
The payments must also be provided under a program that meets the general requirements of Code Section 127, which include, among other things, that the program be in writing, that the payment not discriminate in favor of highly compensated employees, and that its terms and availability be adequately communicated to employees.
Employers electing to provide this benefit may issue payment directly to the lender or make payment to the employee. Employees who receive student loan assistance may not deduct the interest portion of that excludible student loan payment under Code Section 221.
As indicated above, employers who wish to take advantage of the new employee student loan assistance available under the CARES Act must provide the benefit through an education assistance program that meets the requirements of Code Section 127. Those employers with existing programs who wish to provide the new benefit will also likely need to amend their programs to include student loan repayments as an available benefit.