April 19, 2024 - Varnum LLP
Some employers have found that providing educational assistance benefits can be a cost-effective way to attract, retain and motivate employees. Recent legal changes have expanded the scope of employer-provided tax-advantaged educational assistance benefits to cover student loan repayment. This advisory outlines some of the newest options and provides a refresher on how existing benefits are used.
If your 401(k) plan provides matching contributions, you can leverage one of the biggest changes: allowing some common student loan repayments to count as contributions for matching purposes. Once the plan is amended, employees can receive 401(k) matching contributions based on their eligible student loan repayments, as if they had contributed the student loan payments as elective deferrals to the plan. An employer who wants to provide this option should work with legal counsel and other service providers to ensure the benefit is properly implemented and administered.
Another newer and increasingly popular choice is offering employees tax-favored repayment of qualified student loans. Up to $5,250 can be provided to each employee tax-free for repayment of eligible student loans. The benefit can be limited to those who make payments (effectively matching repayments) and can be made subject to repayment for employees who leaves. As a tax-advantaged benefit, student loan repayment assistance must be properly documented in a written plan and must be offered to a nondiscriminatory class of employees. If the company wants to provide more than $5,250 in benefits each year, the amount over $5,250 will be subject to ordinary income taxes.
Tax-Favored benefits are valuable, but legal and tax-based restrictions can dampen a bespoke approach to student loan repayments which many companies prefer. An increasing number of companies have also established taxable student loan repayment policies as an executive benefit. Although less tax-efficient, this type of benefit can be used to attract and retain talent in key, high demand positions and departments, and is often subject to repayment if the employee leaves. While not a tax code requirement, careful documentation provides valuable protection for the company and can help avoid potential claims and controversies that arise when cash payments are promised or paid. Unlike the tax-favored benefits, this option can be used to provide benefits to more senior employees who may have children with student loans.
Employers may provide tax-favored payments to cover employees’ tuition, fees, school supplies, and similar payments. This is limited to the same $5,250 threshold for student loans. This is not a new benefit. However, the rise of tax-favored student loan repayment has brought these benefits back into focus. They should be generally available to all employees, although companies can require the education to meet certain standards (if they are clearly explained) and can require repayment if certain conditions are not met, such as leaving employment or not completing the course. There are limits on what can be paid and these restrictions must be described in the required documentation. Fortunately, the $5,250 limit often means that the restrictions are not problematic in practice. Educational benefits can help keep highly motivated employees from leaving, help create critical leadership development and promote a positive culture.
A new and careful look at student loan and educational benefits is overdue at many companies. If you have questions, need your documentation updated or want more information, contact a member of our benefits team.
Charles M. Russman, Partner
Carolyn M.H. Sullivan, Associate
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