Tuition reimbursement and support can be an enticing employment benefit, particularly for firms recruiting recent grads, or in industries that require additional licensing, education or certification to grow in the field. While the topic of student loans is front page news these days, employers may not be aware of a provision of the CARES Act, Student Loan Repayment Assistance (SLRA), that allows employers to help ease the burden of student loans in a way that benefits both the employer and the employee. If your clients employ people for whom a college education is a requirement, then benefits like loan repayments can attract professionals and improve retention in today’s competitive job market.
What Makes SLRA Different
Tuition reimbursement isn’t new. Many employers have offered tuition assistance benefits for employees actively enrolled in approved education programs. Tuition assistance can help cover tuition, books and supplies. However, the CARES Act allows employers to make direct payments toward an employee’s existing student loan. These payments, up to $5,250 per year, are considered non-taxable expenses for the employers, and are not considered income, therefore not taxable for the employee. Additionally, as it does not count towards the employee’s income, it won’t impact the payment calculation for borrowers enrolled in income based payment plans. In the past, tuition reimbursement was treated like a bonus, and the employee would be taxed on the payment as though it were a taxable wage.
Why Offer Student Loan Repayment Assistance
In addition to the tax benefits, developing an SLRA plan can help businesses of all sizes become an employer of choice and stand out from the competition. More than 25% of both Millenial and Gen Z job seekers have indicated loan repayment as very or extremely important, preferring this benefit to 401(k) plans. When workers feel burdened by student loan payments, they often choose not to contribute to employer sponsored retirement plans. The CARES Act extends these tax benefits through 2025, and while it is likely to be extended, now is the time to put this benefit in place.
How Businesses Can Get Started With SLRA
CPAs can work with their clients to review their financials and determine how much the business could contribute towards repayment. This should include considering factors such as mitigating the cost of frequent turnover, whether they would rather offer smaller amounts of assistance to more employees, or more money to a smaller class. Remember, employers are not required to contribute the full $5,250 per employee. Some businesses offer a tiered structure, where they contribute more each year, rewarding employees for remaining with the organization. Others offer a percentage of salary, incentivizing employees to work towards raises and promotions. The details of the benefit must follow IRS guidelines in Publication 15-B1, which cover Educational Assistance Programs. The guidelines indicate who can be covered, nondiscrimination, and how to report taxable assistance over $5,250.
Developing an SLRA benefit requires working hand-in-hand with HR. It’s critical that the benefit is offered fairly and does not primarily benefit higher earners. Eligibility for this benefit must be equitable and ideally job based. It can’t be offered to “sweeten the pot” of salary negotiations, like stock options or vacation days. This is where you can work with your clients to help them understand the total per employee cost of providing loan repayment assistance so they can confidently offer this benefit. Finally, these payments can be made directly to the employee, rather than the student loan servicer, so businesses will also need to work with their payroll provider to ensure these payments are made and reported correctly.
What about S-Corps and Self-Employment?
The spirit of the law is designed to help lower wage earners. Thus, only individuals earning up to $125,000 are eligible for the $5,250 assistance. Additionally, owners are only able to receive up to 5% of the benefit. However, all employers are able to offer repayment to employees, even if they personally cannot participate. CPAs will have to work with clients on a case-by-case basis to determine whether or not they qualify and how to properly take advantage of it if you determine that they do. There is speculation that if the tax exemption is extended beyond 2025, it will include more coverage and clarity for sole-proprietors and similar small businesses, so stay tuned.
With nearly 15 million people between 25 and 34 carrying student loan debt, the issue will likely remain front and center for many years to come. Helping your small business clients understand how they can meet the needs of current and future employees may help them get ahead. As always, we’re here to help CPAs support their small business clients. If you have any questions regarding Student Loan Repayment Assistance or any educational support benefits, reach out. Our team is here to help.