Student loan repayment freeze ending – how do you help your clients?

Student loan repayments were frozen for several years, but the forbearance period has now ended and borrowers will be required to begin repayment again in October.  With all the other financial stresses on younger employees (typically the group with the most student loan debt), the restart of the repayment requirements will likely cause some serious concerns and anxiety.  Advisors should be ready to discuss the issue with clients.

Recent estimates of outstanding student loans put the figure at $1.8 trillion. Due to the pandemic and stress around the economy, the last two presidential administrations froze repayment and interest on federal student loans to provide the borrowers with some breathing room.  The Biden administration attempted to wipe out much of the debt entirely but was overruled by the Supreme Court.

Although the administration is still attempting to figure out a way to ameliorate the repayment of that debt, payments are due to resume this month and, employers can expect their employees to resume their anxiety around that debt.  How can you advise employers regarding the options available to assist in the repayment of student loan debt to augment employees’ financial well-being?

Three options employers should consider to assist employees with student loan repayments

1.  Direct cash payments or offsets of other perks. Employers have the option (as they always have) to pay their employees’ student loans or provide employees with the funds to do so. With any cash payment (or other value provided) from an employer, the amount of the payment is taxable income to the employees (unless there is a specific exclusion in the Internal Revenue Code).

 

Employers are free to provide as much or as little as they desire to employees for that purpose. As with all compensation, it’s important to advise employers that they should be sure to communicate the structure of the program and any requirements or restrictions around such payments.  Similarly, if the employer wants to structure the payment differently, such as in the form of a signing bonus (perhaps to attract new employees) or to permit employees to offset other benefits (such as unused vacation or paid time off), they can do so.

Employers that choose to assist employees in this way are generally free to structure the programs in the way that best fits the employer’s culture and circumstances.

 

2. Student loan payments via a Qualified Educational Assistance Program.  Qualified Educational Assistance Programs were adopted by Congress to provide employers a temporary option to repay up to $5,250 of their employees’ student loan repayments on a tax-free basis annually.

Congress temporarily expanded IRC 127 tuition reimbursement plans to apply to student loan repayments as well as one way to address the economic dislocation caused by the pandemic restrictions. That expansion will be available through 2025, unless extended.

The tax-free nature of this benefit is likely very attractive to most employees who have student debt.  The cost is also offset somewhat because the payment, unlike regular taxable income, is not subject to the employer or employee cost of FICA and FUTA.

Advisors will have to note, however, that if structured as an IRC 127 exclusion, the program must meet the requirements of Section 127, including, among other things, that it be part of a written plan, that provides educational assistance to employees.  Employers that already maintain educational assistance plans for current tuition reimbursement will not find those requirements difficult to meet.

3.  401(k) match option. SECURE 2.0 Act of 2022 provides a new option tying student debt repayment to employer 401(k) plans. Recognizing the difficulty of saving for retirement while still being burdened by student debt, a new law permits employers to treat employees’ student loan repayments as though they were contributions to the employer 401(k) plan and, therefore, eligible for employer matching contributions into the 401(k).  The loan repayments themselves are not retirement plan contributions so they are not directly subject to the normal 401(k) requirements, but the employer contributions are subject to the 401(k) rules.

 However, the loan repayments are subject to additional requirements as specified in the law (regulations have yet to be adopted to clarify all the requirements) including that the employees certify annually that the payments were made for the higher education expenses of the employee, spouse or dependent and that the plans are amended to take advantage of the QSLP match.

Advisors can assist employers who would like to provide student loan repayment options to employees. The easiest option is to include student loan payments as taxable income.  The other options will generally offer more tax benefits and therefore more value for the employees, but they will come with some additional administrative friction in their adoption.

 

Jay Kirschbaum is senior vice president and director-benefits compliance at World Insurance. He is a tax and ERISA attorney focused on compliance for employer health and welfare plans. Contact him at [email protected].

 

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