Employers: Take Advantage of Tax-Free Student Loan Repayment Before It's Gone
Updated: Nov 10, 2020
Many of us (myself included) feel weighed down by student loan debt and its affect on our long-term goals. Our ability to build up emergency savings, pay for a wedding, or buy our first home is hampered by our student loan debt service.
A lesser known provision of the CARES Act is the temporary tax-free assistance it allows employers to provide their employees; employers may contribute up to $5,250 toward each worker’s student debt through December 31st, tax-free to the employee.
Many companies have adopted an Educational Assistance Program for employees who are saddled with debt as a way to attract and retain talent. However, before the CARES Act, this benefit came with a tax burden for both employees and employers. For tax purposes, when a company offered a student debt repayment plan, the funds were treated as regular income for the employee and the employer.
Employee and Employer Taxation
Employees are taxed at the Federal and State levels and are also required to pay FICA taxes. FICA taxes consist of Social Security and Medicare tax for a total of 7.65%, and for high earners (above $200,000) there is an additional 0.9% Medicare surtax. Employers pay an equal amount of FICA tax (7.65%) on the income and are subject to both Federal and State Unemployment tax.
To highlight the impact of the opportunity presented by the CARES Act, the chart below shows the tax burden of an employee living in Michigan in the 22% income tax bracket who is given $5,250 in education assistance from their employer. This temporary benefit due to the CARES Act results in an additional $1,779 for the employee that can be used to pay down student loan debt!
Proponents of this benefit are advocating to extend this provision or to make it permanent. Many of us feel our monthly student loan payments hardly put a dent in our balances; however, benefits like this will help immensely! Employers interested in attracting and retaining talent should consider adopting an Educational Assistance Plan, especially while this opportunity is available.
Disclaimer: Employers must consult their attorney, there are strict regulations to follow to properly implement an Educational Assistance Program.