There is a hidden gem in the CARES Act, which includes a provision whereby certain payments of student loans by an employer may be excluded from an employee’s taxable income in a limited capacity. Prior to the CARES Act, an employer could maintain a qualified educational assistance plan (defined below) and provide up to $5,250 in educational assistance. It is important to note that educational assistance prior to the CARES Act refers to current tuition and fees—not student loan payments. In other words, an employer could pay tuition and fees for an employee to take a course while employed in his or her current job. This type of educational assistance has long been permitted, is not affected by the CARES Act, and continues going forward.
However, the CARES Act temporarily expands the types of payments that are permissible under a qualified educational assistance plan to include certain employer payments toward employee student loans. An employer is permitted to remit employee student loan payments paid pursuant to a qualified educational assistance plan, and up to $5,250 of such payments may be excluded from an employee’s wages. This only applies to payments made during the time period March 27, 2020, to December 31, 2020, and not for any future period beginning January 1, 2021.
Payments made either directly to an employee or directly to a student loan lender during that period may be excluded from an employee’s taxable income, subject to the dollar limitation. So if an employer makes a student loan payment on behalf of an employee pursuant to a qualified educational assistance plan, then $5,250 of the student loan paid between March 27 and year-end can be excluded from the employee’s wages. Student loan payments made prior to March 27, 2020, and beginning in 2021 are not eligible to be excluded from an employee’s wages.
The qualified educational assistance plan must meet certain requirements in order for the payments to be excluded from an employee’s wages. Payments made outside of a qualified educational assistance plan are not eligible for exclusion from wages. These requirements apply whether the payments are for current tuition or student loans within the aforementioned time window. A qualified plan must meet all of the following requirements:
- The plan must benefit a broad class of employees and may not discriminate in favor of highly compensated employees.
- No more than 5% of the benefits may go to shareholders or owners of the business.
- The plan may not offer cash in lieu of the benefit.
- The plan must make reasonable efforts to notify all affected employees that the plan exists for their benefit.
Many employers may have in place a qualified educational assistance plan that previously paid tuition and fees for employees. With this temporary expansion under the CARES Act, the qualified educational assistance plan can provide relief to employees who completed their educational coursework and need assistance with repaying student loans, as long as the plan is not limited to a specific group of individuals.
If you have questions about a qualified educational assistance plan or other aspects of student loan repayments, contact a PYA executive below at (800) 270-9629. Additional COVID-19 guidance may be found on PYA’s COVID-19 hub.
