As student loan payments resume for millions of taxpayers, the IRS is highlighting a little-known tax benefit that employers can use to assist their employees in paying down student loan balances. This benefit offers a tax deduction for the employer and a tax-free benefit to the employee.
In 1978, Congress created an expiring tax benefit that allowed for employers to provide tax-free assistance to their employees for qualified education expenses. This benefit was made permanent in 2012 and expanded by the CARES Act of 2020 to allow employers to contribute up to $5,250 tax-free annually to their employees’ student loans until December 31, 2025.
Employer educational assistance programs, different from tuition reimbursement plans, allow employers to provide a tax-free benefit to their employees for certain educational expenses including for books, equipment, supplies, fees, tuition, and other education related expenditures. Tuition reimbursement schemes are generally cover only tuition and related expenses for courses taken while employed, whereas educational assistance programs enjoy a broader range of qualified expenses.
Under the CARES Act of 2020, payments made directly to a lender or those made to employees both qualify for tax-free treatment up to the annual limit of $5,250 per employee. To utilize this tax-free benefit, employers must implement the educational assistance plan under a formal, written program sponsored by the employer. Benefits up to the annual limit remain tax-free for the employees while also providing a deduction to the employer, making it particularly attractive to employers seeking to recruit talent for their organization.
If you are an employer of recent graduates, consider implementing an educational assistance plan to help your employees tackle their student debt and improve their financial well-being.
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