Educational benefits are a cost-effective and tax-friendly way to attract, retain, and motivate employees. Recent legal changes have expanded employer-provided, tax-advantaged educational benefits to cover student loan repayment. These tax benefits are now permanent, increasing interest in the programs.
Tax-Favored Student Loan Repayments
Employers can provide up to $5,250 per employee, tax-free, for repayment of eligible student loans. This amount will increase over time with annual cost-of-living adjustments. The benefit can be limited to employees who are actively making loan payments (effectively a “match”) and can be made subject to repayment if an employee leaves within a set period.
As a tax-advantaged benefit, student loan repayment assistance must be properly documented in a written plan and must be offered to a nondiscriminatory class of employees. Any amount over $5,250 will be subject to ordinary income taxes.
Other Student Loan Repayment Benefits
Employers may also provide taxable student loan repayment benefits, generally to a select group of employees as an executive benefit. Although less tax-efficient, this type of benefit can help attract and retain talent in high-demand positions and can be subject to repayment if the employee leaves.
These benefits are not tax-advantaged and are not subject to the legal restrictions that apply to tax-favored student loan repayments. While a written plan is not required, careful documentation can protect the company from claims and clarify expectations. Unlike the tax-favored benefits, this option can be extended to more senior employees who may have children with student loans.
Educational Assistance Benefits
Employers may pay up to $5,250 per year, tax-free, for employees’ tuition, fees, school supplies, and similar payments. This is not a new benefit, but the rise of tax-favored student loan repayment has renewed interest.
These benefits must be offered on a nondiscriminatory basis to similarly situated employees, although employers can set reasonable educational standards, for example, accredited programs related to the employee’s job, and can require repayment if certain conditions are not met, such as leaving employment within a set period or not completing the course. These restrictions must be described in a written plan.
The $5,250 limit often means that the restrictions are not problematic in practice. Educational benefits can help retain highly motivated employees and those with leadership potential from leaving, support leadership development, and promote a positive workplace culture.
Retirement Plans
If your 401(k) plan provides matching contributions, you can allow certain student loan repayments to count as contributions for matching purposes. Once the plan is amended, employees can receive 401(k) matching contributions based on eligible student loan repayments, as if they had contributed those amounts to the plan as an elective deferral.
Employers who want to provide this option should work with legal counsel, their recordkeeper, and their payroll provider to ensure the benefit is properly implemented, communicated, and administered.
A fresh look at student loan and educational benefits is needed at many companies. If you have questions, need your documentation updated, or want more information, contact a member of our Employee Benefits Practice Team.
