As we wrote during COVID, the CARES act included a provision allowing employers to repay up to $5,250 of their employee’s student loans as a tax-free benefit. While this provides a great fringe benefit for any staff member burdened with student loan debt, practice owners win too since they can write off the full amount paid without owing any payroll taxes on the loan repayments made. The 12/31/20 deadline originally set back in 2020 and then subsequently extended until 12/31/25 is now permanently extended as part of the most recent tax changes.
Please note that this valuable employee benefit is only partially available to the practice owner’s family members. Just 5% of the amount paid in total for this generous benefit can go to pay down student loans for themselves and their relatives.
To offer this employee benefit, you first need to create a written document to distribute to all your staff. The good news is that the IRS has provided a sample plan for employers. And remember, if you offer to pay down the student loan debt for one employee, you need to provide an equivalent benefit to all your employees.
To learn more about this opportunity, check out the frequently asked questions (FAQs) in FS-2024-22 related to educational assistance programs, which includes these two FAQS:
What are educational assistance benefits?
Tax-free educational assistance benefits under a section 127 educational assistance program include payments for tuition, fees and similar expenses, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.
Tax-free educational assistance benefits also include principal or interest payments on qualified education loans (as defined in section 221(d)(1) of the Code). Section 127 requires that such loans be incurred by the employee for the education of the employee and not for the education of a family member such as a spouse or dependent. The payments of any qualified education loan can be made directly to a third party such as an educational provider or loan servicer or directly to the employee, and it does not matter when the qualified education loan was incurred.
What is a qualified education loan?
A qualified education loan (as defined in section 221(d)(1)) is a loan for education at an eligible educational institution. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution as defined in sections 221(d)(2) and 25A(f)(2). The Department of Education determines whether an organization is an eligible education institution. A loan does not have to be issued or guaranteed under a Federal postsecondary education loan program to be a qualified education loan.