by Nicholas Castellano, President and CEO, Castle Benefits
For many years, workers have been battling their student debt and unable to contribute to their 401(k) or 403(b) plans. With the change in health care rules allowing employees to stay on their parents’ plans to age 26, attracting quality employees has become more difficult. These newly hired employees want to get rid of student debt so they can move on with their lives.
Let us look at some startling statistics:
- 70% of 2020 graduates have student loans.
- 45 million people currently have student loans totaling $1.6 trillion. This is up from $600 billion in 2007 and $300 billion in 2003.
- 80% of student loan borrowers consider their loans to be of significant stress.
- 90% of borrowers feel student loan repayment assistance would positively affect their decision to join and/or stay at a company, but only 8% of employers are offering this assistance.
As you may know, Congress officially approved a sweeping, $1.3 trillion government spending bill that included hundreds of billions in funding for COVID-19 relief and other measures, just days before the CARES Act relief measures were set to expire. Known as the American Rescue Plan, it provides an annual tax exclusion of $5,250 per employee to cover student loan payments. This provision applies to any student loan payment made on behalf of the employee by the employer before January 1, 2026.
How do you qualify and set up these educational assistance plans? Section 127 of the IRS Code provides an exclusion of up to $5,250 per calendar year from an employee’s gross income for amounts received by the employee, provided certain requirements are met.
To qualify under Section 127, a program must:
- Have a written plan document detailing the benefit.
- Not provide more than 5% of its total annual benefits to individuals who own more than 5% of the company’s stock.
- Not provide eligible employees with a choice between educational assistance benefits and any other taxable compensation (whether cash or noncash).
- Provide eligible employees with reasonable notification of the availability and terms of the program.
- Benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees. An employee is a highly compensated employee, for purposes of Section 127, if the employee meets either either (1) owned at least 5% of the employer’s stock in the preceding or current calendar year, or (2) received compensation from the employer in the preceding year in excess of a specified amount determined annually by the IRS.
If the program meets these criteria, an employer can pay an employee up to $5,250 in education assistance benefits each year on a nontaxable basis. The exclusion applies whether or not the courses taken are related to the employee’s current job responsibilities or are part of a degree program.
How can this help you as an employer? The benefits are clear: you will now be able to help a number of your employees out with their biggest financial stress and help them erase their student loan debt sooner. This loan repayment assistance program can not only help organizations attract and retain professionals and reduce attrition rates among young, talented employees, but it can also minimize financial stress for employees, enabling them to be happier and more productive.
It’s also important to note that the program described above is distinct from the federal student loan interest moratorium which is slated to continue through September 30, 2021, via an executive order signed by President Biden on Inauguration Day. Federal student loan borrowers have been in forbearance since the CARES Act became law in March 2020, meaning they are enjoying an automatic, interest-free pause on payments. The pause was expected to sunset as of January 31, 2021, after being extended twice by the Trump administration, but President Biden’s executive order extended that date through the third quarter of this year.
While we understand your organization may not be able to afford a student loan repayment assistance program even though many of your employees have private loans, there are a variety of programs designed to help employees with student loan debt as well as employees who have co-signed on their child’s student debt loan. After researching many plans, the one I find the most compelling is one in which there is no cost to the employee or employer. With extraordinarily little information, they will do all the work by reaching out to almost a dozen contracted financial institutions on the employee’s behalf to secure the best terms.
Nicholas Castellano is President and CEO of Castle Benefits. For additional information, please do not hesitate to contact him at [email protected].