December update on Tax-Free Student Loan Assistance

Earlier this year, the CARES Act authorized employers to make tax-free contributions to student loans for the first time in history. Under the legislation, employers that adopted a section 127 educational assistance plan could exclude contributions to student loans from employees’ gross income, up to a limit, through at least December 31, 2020. 

This temporary tax-free treatment avoids the need for employers to pay payroll tax (about a 10% savings) and for employees to be withheld for income tax (about a 30% savings) on the funds that employers contribute to student loans. 

Following passage of the legislation, Peanut Butter provided its clients (at no additional charge) with the technology, process and templatized plan documents required to contribute to student loans tax-free.

Employers of all sizes and companies across industries are adding Student Loan Repayment into their benefits offerings, many having chosen to make contributions on a tax-free basis during 2020.

With the CARES Act set to expire at the end of this year, you may be wondering: How might employer-sponsored Student Loan Assistance look in the new year?

First, there will be more employers offering Student Loan Assistance in 2021 than ever before. This is driven by several factors:

  • Companies need to stand out when hiring and the market for talent remains competitive in many industries including healthcare, technology, professional services and financial services.
  • Turnover is expensive and companies offering Student Loan Repayment consistently report reductions in voluntary employee attrition, thereby reducing their costs of lost productivity, rehiring and retraining were those employees to have left.
  • More companies than ever have made diversity an imperative. Since 2/3 of student debt is held by women, and African Americans and Hispanics are 2x as likely to hold student loans as their white peers, Student Loan Repayment is a unique financial incentive that employers, like Google, are now offering in order to improve the positive impacts of gender and cultural diversity.
  • The payment holiday on federal student loans is set to end 1/31/21, which means that come February 1st, nearly 40M Americans will again be required to pay hundreds of dollars per month toward their student debt and see interest accrue on their loans. Employers have a unique chance, right now, to step in and make a difference for their team members.
  • Finally, many companies are struggling with worker disengagement and apathy due to challenges presented by working from home and/or working on-site during a pandemic. It’s no longer feasible to host team outings, events or meals, so companies need to find new ways to engage employees by addressing employees’ wants and challenges.

Second, there may continue to be small tax advantages for employers offering Student Loan Repayment. Here’s the skinny:

  1. It is highly likely that company contributions to student debt will continue to be tax deductible for employers in 2021. 
  2. It is possible that the tax-free treatment enabled by the CARES Act could be extended temporarily or enacted permanently. This may come through a year-end tax-extender package or from the passage of H.R. 1043 / S. 460, which now counts bi-partisan co-sponsorship from 65% of Senators and 63% of members of the U.S. House.
  3. The CARES Act did not authorize tax-favored treatment of employee contributions to student debt, and it is unlikely such treatment would be enabled by new legislation for 2021.

At this time, companies offering Student Loan Repayment in 2021 should be prepared to see faster hiring timelines, longer employee tenure, greater diversity, increased employee engagement, and can expect to record those contributions as taxable (imputed) income, the same way contributions had been recorded prior to the CARES Act. Peanut Butter clients looking to re-familiarize themselves with imputed income entries can find a copy of our payroll setup guide on the Toolkit page of their employer administrator accounts.