The Coronavirus Aid, Relief and Economic Security (CARES) Act has provided a wide range of programs that affect employee benefit plans, employers and employees. One benefit that has flown under the radar is a new, temporary tax-qualified student loan repayment plan. Section 2206 of the CARES Act allows employers to claim a tax deduction for repayments of employee student loans, and allows employees to exclude these payments from taxable income, in amounts up to $5,250 a year. In essence, the CARES Act treats student loan payments as an education assistance fringe benefit. Normally, such benefits may be paid only for (i) books and equipment, (ii) tuition and fees, and (iii) necessary school supplies. The CARES Act adds employer student loan repayments made on or after the effective date of the CARES Act (March 27, 2020) through Dec. 31, 2021.
Practically speaking, we have seen little interest from employers to adopt such a plan. That is probably because employers, like everyone else, are currently doing what they can to conserve cash, including suspending matching and profit sharing contributions to qualified retirement plans.
Nevertheless, this benefit may be something to watch in the future, and we would not be surprised if Congress made this program a permanent fringe benefit, especially since employees who recently graduated from school appreciate such programs as a valuable benefit. Recognizing the draw of employer repayments of student loans, some employers have already adopted creative ways to try to provide it through qualified retirement plans. The CARES Act’s approach of using Code section 127 educational assistance programs, however, would appear to be much cleaner and easier to administer than trying to provide such a benefit through a qualified retirement plan.
Although it hasn’t garnered much employer interest, it is still worth noting that this program is available. If the new normal produces an economic rebound, there still may be time for employers and employees to benefit from this program.
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