Tax Preferred Student Loan Repayment Programs

The COVID-19 pandemic related CARES Act (see – https://smstevensandassociates.com/cares-act-impact-on-health-insurance/) granted tax preferred status to loan repayment employee benefits.  Referred to as loan repayment assistance programs – LRAPs or EAPs (educational assistance programs), this new tax preferred benefit is available through 2025 (unless extended), thanks to the Consolidated Appropriations Act (CAA), signed by the President toward the end of December, 2020.  LRAPs/EAPs provide employers with yet another employee recruitment and retention tool, but there are important considerations.

Historically, employer student loan assistance was treated as wages, and thus subject to taxation of both employer and employee.  The CARES Act/CAA has temporarily made such assistance payments of up to $5,250 per year, tax-free to both, creating an incentive for employers that are looking for talent.  A 2019 survey conducted by the Society of Human Resource Management (SHRM) found the number of employers offering LRAPs/EAPs has nearly tripled from 3% in 2015 to 8% in 2019, which indicates a solid trend; and these were not tax-free!

Here are some important considerations for employers that are thinking about offering a LRAP/EAP:

• – The loans can be either private or federal.
• – Payments are tax-free regardless of whether made directly to the lender or the eligible employee.
• – The amount of tax free loan payment is limited to $5,250 per employee, per year, and includes both loan payments and tuition reimbursement.
• – Student loan interest on LRAP/EAP affected loans is NOT tax deductible.
• – LRAP/EAPs can be offered to current employees, former employees (e.g., retired, laid off, on leave), and leased employees (meeting certain conditions).
• – LRAPs/EAPs require a formal plan document, and the establishment of an IRS code section 127 program.
• – Any employer, including self-employed, is eligible to create a Section 127/LRAP/EAP.
• – LRAP/EAPs cannot be offered in conjunction with a Section 125/Cafeteria Plan.
• – Both undergraduate and graduate level coursework are eligible.

If LRAPs/EAPs gain significant traction, the tax benefit could become permanent if the currently pending Employer Participation in Repayment Act, or similar legislation, is passed into law.

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