Employer interest in providing assistance with student loans and educational benefits is on the rise. Until now, the benefits have been limited and the rules burdensome, but recent changes may make these options worthwhile to more employers, especially those in competitive markets and who are seeking to attract or retain employees with larger student debt or aspirations for additional education.
After the CARES Act and SECURE 2.0, employers have two options for assisting employees with student loan payments: educational assistance programs and student loan payment matches in retirement plans. Through an educational assistance program, employers can contribute up to $5,250 of student loans per employee without the benefit being subject to income tax. Several requirements must be met to obtain the tax benefits, including:
- Setting forth the terms of the program in a written plan document;
- Limiting the percentage of benefits paid to owners and highly compensated employees; and
- Notifying eligible employees of the amount of benefit, loans eligible for reimbursement, and other important information.
Employee benefit service providers are increasingly offering payment, verification, and notice services with respect to student loan assistance programs, which can help employers administer these benefits. Outsourcing these services reduces the administrative burden on employers, and can also help employers avoid seeing sensitive personal information they would not otherwise receive.
Educational assistance programs can not only provide student loan repayment, but can also directly pay for certain education expenses for employees seeking further education or training. Regardless of the use, the same $5,250 limit applies and so do the requirements to receive the tax benefits (except only certain types of education expenses, rather than certain student loans, can be paid). Having flexibility to provide tax-favored educational opportunity or student loan repayment can help employers attract and retain employees and provide a more competitive compensation package.
A recent change to qualified plan rules may also be of interest to employers looking to help employees with student loans. Beginning in plan years starting on or after January 1, 2024, employers with defined contribution retirement plans (such as 401(k) or 403(b) plans) can choose to count certain student loan payments as contributions for purposes of matching contributions or elective deferrals for safe harbor plans. Even though no contribution in the amount of the student loan payment is made to the plan, the student loan payment is treated as a contribution, allowing a matching contribution to be made. Employers are permitted to rely on self-certification about the amount of student loans paid by the employee. The definition of student loan is also generous – but not all encompassing – even including some student loans of an employee’s spouse and dependents. Many questions are still outstanding about administrative and legal requirements.
Employers who choose to make this optional feature available should coordinate with their administrator to ensure consistent and compliant application as well as with legal counsel to assist with some of the more technical aspects. If an employer wants to implement the change, it is important that the plan documents be properly and timely amended.
Employer-provided student loan repayment and educational training benefits can be a boon to businesses of almost any size and sector. If you are interested in learning more, please contact a member of Varnum’s employee benefits team.