The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides numerous methods by which employers can expand existing programs or create new ones for the benefit of their employees. One such program, the Code Section 127 educational assistance program, now includes the ability for employers to pay up to $5,250 in 2020 toward an employee’s student loan debt.

Educational Assistance Program Overview

Under Section 127 of the Internal Revenue Code, employers may pay an employee up to $5,250 a year in educational assistance benefits on a nontaxable basis. These payments may be used for tuition, fees, books, supplies, and equipment necessary for undergraduate or graduate courses. The payments cannot be used for supplies that will be retained by the employee following completion of the course — e.g., lodging, transportation, meals, etc. In addition, courses involving sports, games, or hobbies are not eligible unless these types of courses concern the employer’s business or are required as part of the employee’s degree program.

To qualify as an educational assistance program under Section 127, the following requirements also apply:

  • The program must be a separate written plan.
  • Employees must be given reasonable notification of the availability of the program.
  • The program cannot discriminate in favor of highly compensated employees per section 414(q).
  • The employer cannot pay more than five percent of the total amounts paid for the program to employees (or their spouses or dependents) who have a five percent or more ownership stake in the company.
  • The program cannot provide eligible employees with a choice between educational assistance and other benefits included as part of their gross income.

Program Expansion Under the CARES Act

Thanks to the CARES Act, payments made to employees after March 27, 2020 and before January 1, 2021 under an educational assistance program may now be applied to the payment of student loan principal or interest.

Student loan debt relief payments count toward the $5,250 annual benefit. Employers may either amend an existing educational assistance program or adopt a new program to realize this benefit. Employers need to create a process for employees to submit requests, and they need to notify their payroll provider that the payments are to be treated as non-taxable.

Hall Benefits Law helps organizations set up the benefits plans that are right for their employees and business goals, put processes in place to ensure regulatory compliance, and keep those benefit plans updated based on changes in the law. To learn more about the services Hall Benefits Law offers, call 678-439-6236.

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