Qualified educational assistance benefits provide tax advantages for both employees and employers and can also bolster an employer's recruitment and retention strategy. For employers currently offering (or who wish to offer) educational assistance benefits to employees through qualified Internal Revenue Code Section 127 plans, COVID-related federal legislation includes a temporary provision permitting employers to provide tax-free payments of up to $5,250 toward employees' student loans through the end of 2025.
Employers may provide up to $5,250 annually on a tax-free basis to employees in accordance with a qualified educational assistance benefit plan pursuant to Internal Revenue Code Section 127. A Section 127 educational assistance benefit plan must be established and maintained by an employer under a separate written plan document and is subject to nondiscrimination rules to ensure the plan does not discriminate in favor of highly compensated employees. Further, a Section 127 plan cannot offer other taxable benefits or cash that can be chosen by employees instead of educational assistance and all eligible employees1 must be reasonably notified of the plan.
Educational expenses that generally qualify under a Section 127 plan include tuition for graduate or undergraduate-level courses, textbooks, necessary equipment, and supplies but not the cost of lodging, meals, transportation, or those supplies that employees keep at the end of the course. Employers may require employees to provide substantiation that the educational assistance provided was used for qualifying educational expenses.
Any educational assistance amount provided by employers to employees in excess of $5,250 per year must be included in the employee’s taxable income.
Initially, the Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 127 to include student loan repayment assistance as a qualified educational expense temporarily from March 27, 2020 (enactment date) through December 31, 2020. The Consolidated Appropriations Act, 2021 (CAA), signed into law on December 27, 2020, extended the availability of this provision for employers until December 31, 2025.
As such, qualified educational assistance benefits provided by an employer include student loan payments made after March 27, 2020 and before January 1, 2026. This extended benefit may be paid to the employee or directly to a lender and may include payments of principal or interest on qualified education loans incurred by employees for their education.
Employers that currently offer educational assistance benefits through a qualified Section 127 plan are advised to review and, if necessary, amend their written plan documents to take advantage of the tax savings afforded by the CARES Act and CAA for employer-provided student loan payments through 2025.
For employers that wish to establish a qualified Section 127 educational assistance benefit plan, reach out to your Risk Strategies account team for implementation assistance and support.
For tax-specific questions, employers should contact their tax professionals or advisors for further assistance.
1 Eligible employees include current employees, certain leased employees as well as formers employees who were laid-off, retired, or left on disability. Employees' parents, spouses and/or dependents are not eligible under Section 127 plans.