The Taxpayer Certainty and Disaster Tax Relief Act, recently passed as part of the “Consolidated Appropriations Act, 2021,” has significantly extended the tax exclusions for employer-paid student loan repayment assistance introduced under the CARES Act. With this extension, employers can provide employees with student loan repayment assistance of up to $5,250 per year for 2021 through 2025 (up to $26,250 total).
As discussed in detail in a prior article, the student loan repayment assistance must be made under an educational assistance program that meets the requirements of Internal Revenue Code Section 127. When a qualified program is properly structured and utilized, employers and employees will avoid federal payroll taxes on qualifying payments under the program, and employees will not be subject to federal income taxes that would otherwise apply. Prior to the exclusion under the CARES Act, employers could provide direct student loan repayment assistance only through taxable payments.
To briefly illustrate the possible tax savings, if an employer paid an employee $5,250 as student loan repayment assistance outside of a qualified program, the employer and the employee would both ordinarily have to pay around $400 in payroll taxes (not considering the taxable wage limit). Additionally, assuming the payment is subject to a 22% federal income tax rate, the employee would have to pay $1,155 in federal income taxes. As a result, the benefit would cost the employer around $5,650, but it would provide the employee with a net benefit of only around $3,695. In contrast, if the same payment is made under a qualified program, the benefit would cost the employer $5,250, and the employee would receive a benefit of $5,250, subject to any applicable state taxes.
If you have any questions about student loan repayment assistance programs, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.