The IRS issues a reminder about a tax-free way to help employees pay off student loans
Student debt has more than tripled since 2006. In that year, borrowers collectively owed more than $500 billion in student loan debt.less than Car loans and other consumer debt such as credit cards. And while debt has generally gone up for consumers, it has gone up dramatically for student borrowers. According to the Federal Office for Student Aid, As of March 2023There are about 44 million borrowers who owe more than $1.6 trillion in federal student loans — and that total does not include private loans in repayment (like mine).
As students enter college this fall, that number is expected to increase, not decrease. the average cost of college In the United States it is $36,436 per student per year, including books, supplies, and daily living expenses (this number can vary greatly depending on several factors, including where you live). This is nearly five times the cost of attending university just 40 years ago, far exceeding the pace of inflation. For context, according to the Bureau of Labor Statistics’ Consumer Price Index, today’s prices for other goods and services are about 2.84 times the average prices since 1985.
Moreover, the federal student loan moratorium that began in March 2020 as an emergency measure for the Covid pandemic, will expire at the end of this month. This means that interest on the loans will start accruing again from September 1st and that payments will start again in October.
As families struggle to pay up, the IRS has done just that Issue a reminder About an employee benefit plan that often goes under the radar: educational assistance programs.
Educational assistance programs were created by Congress In 1978although it didn’t become permanent until the passage of the American Taxpayer Relief Act of 2012. You’ll find details at Article 127 of the tax code, which begins:
The employee’s gross income does not include payments or expenses incurred by the employer for the employee’s educational assistance if the assistance is provided pursuant to a program described in subsection (b).
The section outlines program requirements that can be used through 2020 to pay for books, equipment, supplies, fees, tuition, and the like for employees on a tax-deductible basis. But the plan expanded. Now, education assistance programs can also be used to pay principal and interest on an employee’s eligible education loans through December 31, 2025.
To qualify, regulations state that an educational assistance program must be in Form A Written benefits plan. Although this sounds very formal, it’s no different than a health care, retirement benefits, or mobility plan your company likely already has in place.
The plan could allow up to $5,250 to be paid per employee per year for educational benefits—including student loan repayments. Payments made directly to the lender, as well as those made to the employee, are eligible.
Some restrictions apply, including that the plan cannot provide more than 5% of its total annual benefits to individuals who own more than 5% of the company’s stock, and it cannot discriminate in favor of highly compensated employees.
In addition, the plan must aim to help with costs associated with obtaining an education—and employees cannot be given a choice between accepting benefits or other taxable compensation, including cash.
Finally, eligible employees must be given reasonable notice of the plan (posting the notice alongside other benefit plans is usually a safe bet).
If you’re reading this and think you’ve never heard of this benefit, don’t worry. It’s not as widely publicized as you might expect given the number of employees who would welcome relief related to paying their educational expenses, including student debt. But the federal student debt moratorium — and Biden’s student debt relief plan that the Supreme Court struck down in June — has likely pushed it to the background.
Now, as the IRS campaign suggests, the benefit may get more attention. With a still tight hiring market, employers may want to put this feature on their radar to attract job candidates. In fact, it has already been widely adopted by major companies. Employee Benefits Research Institute reconnaissance Last year, it was found that about half of large employers already offered or were planning to adopt this benefit.
To help spread the word and explain the requirements, the IRS is leading a free 75-minute webinar on Thursday, September 14 at 2 pm ET to discuss the program. The webinar will include a question and answer session. To register for the webinar or for more information, visit Online seminars for tax practitioners Page or Webinars for small businesses Page on IRS.gov.
“The IRS wants to remind both employers and employees of this special benefit that can help with student loans,” IRS Commissioner Danny Werfel said. “There is a limited time window for this educational assistance program, and the IRS wants to make sure that employers do not ignore this option that can help companies attract and retain workers.”
