CARES Act: FAQs on Tax-Free Employer Contributions

Posted on: April 17, 2020

CARES Act Student Loan Benefit FAQ

The passing of the CARES Act, specifically the amendment to Section 127 of the Internal Revenue Code, allows tax-free employer contributions toward employee student loans for both federal and state purposes for the remainder of 2020. This change to the federal law will make student loan repayment programs even more valuable to employees, and more impactful for employers to offer as a recruiting and retention benefit. You might have questions about tax-free employer contributions – we have answers.

How did the CARES Act change student loan benefits?

The CARES Act added employer contributions to student loans to Section 127 Education Benefits. This means that employer contributions towards employees’ student loans are tax free.

What is Section 127?

Section 127 is the part of the IRC (Internal Revenue Code) that gives tax preference to educational benefits like tuition reimbursement.

How long will the tax-free status last?

The CARES Act stimulus allows tax-free employer contributions from 3/27/20 through 12/31/20. BenefitEd is hopeful that it will become part of the annual extenders package and remain tax free beyond 2020.

Which federal taxes does this include?

Section 127 exempts the contributions from income tax, as well as payroll taxes (social security & Medicare).

What about state and local taxes?

Section 127 exempts the contributions from both state and local taxes.

Is there a limit on how much an employer can contribute?

Section 127 allows up to $5,250 in total education benefits for a calendar year. At some point this may be increased. This limit is amongst all education benefits offered by the employer.

Does this affect eligibility requirements for a student loan benefit?

Employers have the ability to customize the eligibility requirements of their student loan benefit program. There are restrictions against only offering it to the highest compensated employees or those who own more than 5% of the company.

Can employers deduct their contributions for tax purposes?

Yes, the contributions are fully tax deductible by the employer.

Can employees deduct these amounts for tax purposes?

If an employee contributes through payroll, these contributions are post tax. Individuals can deduct the interest they pay on student loans on their 1040 each year. Because they are receiving tax-free employer contributions, they CANNOT deduct the interest paid by the employer.

Am I required to document my educational benefits program?

Yes, Section 127 requires you to document your plan in writing. BenefitEd assists their employer partners in developing program documentation.

If you have more questions about the CARES Act or tax-free employer contributions, contact us.