Section 2206 of the CARES Act permitted an exclusion of up to $ 5,250 from an employee’s gross income, if an employer paid principal or interest on an employee’s “eligible education loan”.
Section 2206 of the CARES Act was only intended to be in effect for the calendar year 2020. However, the Consolidated Appropriations Act 2021 (the “CAA”) extends this provision of the Act until December 31, 2025.
This CAA provision is found in Section 120 of Division EE, entitled “The Taxpayer Certainty and Disaster Tax Relief Act of 2020”.
It doesn’t appear that during 2020 many employers decided to give student loan forgiveness as a benefit to employees. Given the pandemic, that’s certainly understandable. However, in the future, this might be something employers might find more attractive as a recruiting or retention tool. So, the following is a brief reminder of this benefit.
Section 127 of the Code – Educational Assistance Programs
Section 127 of the Internal Revenue Code (the “Code”) has long provided for an exclusion from an employee’s gross income for reimbursement provided to the employee under a “work assistance program”. ‘education’ of an employer. The maximum tax-free refund amount is $ 5,250 per calendar year.
The employee’s education under the program may be reimbursed regardless of whether or not it relates to the employee’s employment. However, the tuition fee cannot be for a sport, game or hobby.
The CARES law
Section 2206 of the CARES Act amended Section 127 of the Code to allow an employer to pay all or part of an employee’s “eligible education loan” as a non-taxable benefit, provided that this benefit or provided as part of an employer’s educational assistance program.
An important point to note is that the employee would not have had to incur education costs while that person was an employee of the employer.
For example, an existing employee with student loan debt incurred before being hired may have that debt canceled under the plan. Likewise, a newly hired employee with pre-existing student loan debt may also have that debt canceled under the plan.
Section 127 of the Code – Employer plan requirements
Under section 127 of the Code, the employer must establish a written plan and communicate the terms of this plan to eligible employees. In addition, the Plan must meet the following requirements:
Plan terms cannot discriminate in favor of Highly Paid Employees (“HCE”).
To this end, article 414 (q) of the code is referenced. In 2021, an employee is an HCE if they had compensation over $ 130,000 in 2020. 5% of business owners are also considered to be HCEs.
Collective bargaining employees must be taken into account in determining eligibility requirements for non-discrimination, unless educational assistance benefits have been negotiated in good faith.
Controlled group rules apply to test for non-discrimination.
The maximum exclusion of $ 5,250 for the calendar year for the loan exemption must be combined with any other educational assistance provided to the employee under the plan of article 127 of the Employer’s Code for this calendar year.
The plan cannot allow an employee to choose between taxable compensation and benefits and educational assistance. Thus, an employee cannot choose the pay cut as a means of participating in the section 127 plan. Simply put, benefits under the plan must be benefits paid by the employer.
Eligible student loans
The rules that define what will be considered a “qualifying student loan” are somewhat complex. The IRS advises taxpayers to consult Chapter 4 of IRS Publication 970.
However, in general, the loan was to be taken out for the employee’s tuition (i) in pursuit of a diploma, certificate or other program which would lead to a “recognized educational certificate”. ”, And (ii) while taking a course loads at least half (1/2) of the normal course load for that particular program of study.
Government or financial institution loans are acceptable. Loans from family members are not eligible. Loans from pension plans of eligible employers (for example, 401 (k) plans) are not eligible.
Attendance at a “qualifying educational institution” is required. In general, this will include all colleges, universities, vocational schools and other post-secondary institutions that are eligible to participate in the federal student aid program.
The eligible educational institution’s attendance fees include tuition and fees, books, supplies, transportation, various personal expenses, room and board, and various other costs.
© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume XI, number 12