Helping Workers With Student Loan Debt

Jeremiah D. Wood Commentary

Helping Workers With Student Loan Debt

Student loan debt is a big deal in this country, and the forbearance of federal student loan repayments ends Oct. 1, with interest accruing on Sept. 1, 2023.

The restart will have an immediate financial impact on millions of borrowers. With borrowers once again facing their student loan repayments, here are a few options for employers to help their employees with student debt relief.

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Employers can pay up to $5,250 annually toward an employee’s student loan and exclude it from the employee’s wages for income and payroll tax purposes through an Educational Assistance Plan (EAP), a program established and maintained by an employer to help their employees. Since the payments under the EAP are excluded for payroll tax purposes, the employer saves while receiving a deduction for the expense.

The employer can design the EAP to meet their objective while limiting their expense. For example, the employer could impose the following: a limit per employee of less than the $5,250 annual benefit; an overall limit on the amount it will contribute to the EAP, i.e., $50,000 contributed annually; or a requirement that the employee remain employed for up to a year after the reimbursement of the student loan repayment. To receive favorable tax benefits, an EAP must meet requirements in the Internal Revenue Code. Contact your employee benefits attorney for more details if you want to explore an EAP.

Beginning in 2024, a change in the law pursuant to the SECURE Act 2.0 will allow employers to match their employee’s student loan repayments via the employer’s retirement plan, e.g., 401(k) plans, 403(b) plans, governmental 457(b) plans or SIMPLE IRAs. This is another option employers can consider. This matching of student loan repayments must be treated in the same manner as the matching of elective deferrals, e.g., the same rate of matching, same eligibility requirements, same vesting requirements. Additionally, the student loan repayments plus any elective deferrals cannot exceed the applicable annual limits on elective deferrals, e.g., for 2023 it is $22,500, except for the SIMPLE IRA limit, which is $15,500.

This can be helpful to those employees who may not have the financial resources to make elective deferrals in the retirement plan while at the same time repaying their student loans. With this feature, these employees will receive the employer matching contribution during the years they are paying off student loan debt, which will help them save toward their retirement.

Employers can also support their employees with student debt relief by using the working condition fringe benefit for the provision of educational expenses. A working condition fringe benefit, for purposes of educational expenses, is a benefit provided by the employer for an educational expense that would otherwise be deductible by the recipient employee.

Generally, to be so deductible, the expense must be an ordinary and necessary expense incurred in carrying on any trade or business (including being an employee of an employer). There are fairly specific requirements that must be met to satisfy this “ordinary and necessary” standard. However, if the educational expenses qualify, there is no dollar limit on how much the employer can pay for the employee’s educational expenses and there is more freedom when designating which employees receive this benefit. 

Jeremiah D. Wood is a tax lawyer specializing in employee benefits and executive compensation at Friday Eldredge & Clark of Little Rock.

Jeremiah D. Wood is a tax lawyer specializing in employee benefits and executive compensation at Friday Eldredge & Clark of Little Rock.