United States: CAA Benefits Alert: Employers Can Now Pay Student Loan Assistance Benefits Until 2026

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The Consolidated Appropriation Act 2021 (CAA) includes a provision allowing employers to make tax-free payments on their employees’ student loans up to a maximum of $ 5,250 per year until January 1, 2026. This is a five-year extension of a provision originally enacted. in the CARES law. With an estimated student loan debt of $ 1.6 trillion, this extension allows employers to help employees by paying off student loan debt on a tax-efficient basis.

BACKGROUND – STUDENT LOAN BENEFITS UNDER THE CARE ACT

Until the passage of the CARES Act, most employers were unable to provide tax benefits for student loans. The CARES Act, passed in March 2020, included a temporary provision allowing employers to adopt educational assistance programs that pay employees or their lenders up to $ 5,250 per year tax-free to cover expenses. related to student loans. Specifically, the CARES Act amended section 127 of the Internal Revenue Code (Code) to provide that payments up to $ 5,250, made before January 1, 2021, by an employer either to the employee or to a lender of principal and / or interest on qualifying student loans will not be taxable to the employee.

For the first time, employers have been allowed to help employees who have already incurred student loan debt. However, because the CARES Act only allowed these student loan benefits until January 1, 2021, many employers have not had the option of adopting an educational assistance program on student loans.

EXTENSION OF CAA STUDENT LOAN BENEFITS

Article 120 of the Taxpayer Certainty and Disaster Tax Relief Act, 2020, recently enacted under the CAA, extends the original deadline of January 1, 2021 of the CARES Act to January 1, 2026. This will allow employers to provide additional five-year programs and will likely encourage more employers to adopt such programs for the benefit of employees.

REQUIREMENTS FOR EDUCATION ASSISTANCE PROGRAMS

Employer-provided education assistance programs must meet certain requirements to provide beneficial tax benefits for student loans, such as having a written plan document. In addition, all education assistance payments made by employers should be treated as additional employer contributions rather than compensation for employees. Participating employees cannot receive both a loan payment and a deduction from the interest paid on that debt.

Winston to take away: As a result of the CAA’s five-year extension of the Section 127 rule of the Code, employers will likely be more willing to adopt educational assistance programs that allow principal and interest on student loans to count as one. study assistance provided by the employer. To help alleviate student debt for their employees, interested employers should adopt a written program of direct payments to employees or lenders.

This article is part of our series “Unpacking Employee Benefits Provisions in Consolidated Appropriation Law, 2021”. Click on here for other AAC related articles. Please contact a member of the Winston & Strawn Employee Benefits and Executive Compensation Practice Group or your Winston Relations Lawyer for more information.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.

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