CARES Act Legislation Tax

Pre-tax Student Loan Benefit Contributions

Tax Free Student Loan Benefits

As if workplace stress wasn’t bad enough, the Coronavirus is 2020’s new black cloud hanging over society.

Historic unemployment rates, contracting economies and crippled supply chains have in part contributed to both employee and employer uncertainty.

4 recent stimulus activities were passed in March 2020 that you need to know about:

  1. 20 million debt holders may benefit from automatic suspension of payments.  Federal student loan interest is waived for the next six months. 85% of your employees with student loan debt will benefit from some short term relief.
  2. Borrowers who are already enrolled in the Public Service Loan Forgiveness Program won’t have to make ANY payments for the next six months.  BONUS – they will still receive a ‘credit’ for the payments (as if they were paying), but they don’t have to pay anything. The one catch we identified is that they are required to be working full time by a qualified employer. 
  3. The Department of Education is also refunding any garnishments made since March 13. ~830,000 borrowers will receive more than $1.8 billion back from garnishments that will be retroactively forgiven.
  4. CARES Act  Sec. 2206(B)), includes tax incentives for employers who offer student loan repayment as a benefit.

Say Goodby to Student Loan Benefit Taxes

One of the most frequently asked questions we get at Workforce Perks is about the tax benefits.  

Before March 27, 2020 employer sponsored Loan Repayment existed as a taxable benefit. Employers were required to foot the bill for payroll taxes in addition to withholding income taxes.

Our typical response to a prospective partner asking about a tax benefit was to help them understand the financial impact to both the employer and employee by implementing a flexible match loan perk. 

Helping a team member create a plan that can cut their pay-back period in half is enough to incentivize the employee to stay in the same job an additional 5 years.

We all know how expensive it is to replace an employee.  It’s ~20% of their salary.

So, if you’re really that concerned about a tax break, consider that losing an employee making $40k will cost you $8k to replace.  You’re definitely not getting an $8k break in taxes. Anyways…

Student Loan Contributions NOW Pre-Tax

Section 2206(B) of the “CARES Act”, includes tax incentives for employers who offer student loan repayment as a benefit.

This tax incentive is available until January 2021 when it will be up for review again.  

There’s been legislation already in the works for provide a tax incentive even before the CARES Act, so there’s a good chance this will be the catalyst for a longer term benefit. 

The Employer Participation in Repayment Act (1043/S. 460) is the basis for the inclusion in the CARES Act. 

Employers are able to contribute up to $5,250 in pre-tax dollars per year to employee student loans via a Section 127 plan.  

How to Setup a Section 127 plan:

  1. Make sure you comply with IRS requirements for Section 127 Plans here.
  2. Next, your company will need to adopt or amend an existing 127 plan to integrate the Student Loan Repayment plan.
  3. Start making contributions and record them on payroll as pre-tax.

This is a win-win for both employees and and employers:

  • Employees will benefit from an extra ~$0.30 on the dollar (depending on their tax bracket) because employers won’t need to withhold their contributions for taxes.
  • Employers will immediately see a reduction in FICA, FUTA, and SUTA payroll taxes which stay on the balance sheet.  

Surge in requests for a student loan benefit

The time to act is now.

The Student Loan Benefit was already the hottest employee requested perk for 2020.

Once this information starts making its way into your employees Twitter feeds, be prepared for a surge in requests  

Workforce Perks will help you with digital enrollment, loan verification, support, payments and reporting.

We’ll continue to update this post as we learn more.

Set up a call with one of our experts today by emailing [email protected]

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