The Cares Act, passed back in March, allowed for employers to help pay their employee’s qualified student loans or tutition tax free to the employee. Qualified payments are also free from federal payroll taxes for both the employee and the employer. It’s a win-win. Set to expire in 2020, this provision was extended through December 31, 2025 in the new stimulus bill.
Here’s what you need to know:
- Employers can make payments up to a maximum of $5,250 per employee per year.
- Both private and public loans may be eligible, and payments can be made toward both principal and interest.
- Employees save on federal income tax as well as federal payroll tax. Employers save on federal payroll tax.
- Employers can choose between tuition assistance or loan repayment. Not both.
If you are looking to take advantage of this as an employer, you will need to make sure that your educational assistance program meets Internal Revenue Code Section 127 requirements. Previously, these plans required employers to make payments directly to the educational institution or lender. The CARES ACT has allowed for payments to be made directly to the employee if the plan’s documentation is updated to reflect this option.
Who Qualifies: Only employees in a qualified higher education program or who have loans from such a program will qualify. This means spouses or children of an employee are not eligible. A qualified education program is typically defined as one that leads to a degree or certificate and having carried at least ½ the full-time course load of the program. Higher education costs included tuition, textbooks, fees, etc.
Who Does Not Qualify: Employees who do not meet the above requirements as well as those who are 5% or more shareholders are not eligible.
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