Tax Free Education Assistance under Secure Act 2.0

Educational Assistance Programs

As part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), Congress amended Section 127 of the Internal Revenue Code (Code) to permit employers to pay up to $5,250 per year to employees for student loan repayments as part of an educational assistance program. Many employers utilize such plans to provide tuition reimbursement for college or advanced degrees. Under the CARES Act, employers may also utilize these plans to provide student loan debt assistance.

To do so, employers must comply with the requirements of Section 127 of the Code, including:

  • The employer must have a written plan document that lays out the terms of the program;

  • The program must benefit employees or certain former employees who qualify under rules set up so that the program does not favor highly compensated employees;

  • The program must not provide more than 5% of its benefits during any year for shareholders or owners (or their spouses or dependents) who own more than 5% of the stock or of the capital or profits interest of the business;

  • The program must not allow employees to choose to receive cash or other benefits that would be included in gross income instead of educational assistance; and

  • Eligible employees must be given reasonable notice of the program.

An educational assistance program provides a direct ability to pay off student loan debt through a basic but effective tax structure. Employers can make payments either to employees or directly to lenders. Many employers who offer student loan repayment benefits work with a third-party vendor because the employer does not want to be in the position of asking employees for sensitive financial information regarding student loan debt. Vendors often work with lenders either to pay off student loan debt directly or, if the employer provides direct payment to employees, to track or verify student loan debt payments so that the employer can be certain the payments are being used to pay off student loan debt.

The $5,250 limit is the combined limit for all educational assistance, including both expenses related to tuition reimbursement and student loan debt payments. Under current law, the ability for employers to pay up to $5,250 per year to employees for student loan debt payments as part of an educational assistance program expires on December 31, 2025. However, it is often the case that employee benefit options enacted through the Code which are originally scheduled to sunset are extended indefinitely or made permanent. There is no guarantee, but it would not be surprising if the student loan debt payment benefit is extended or made permanent, particularly in the current environment where student loan debt receives significant media attention.

Robert Martin