When it comes to offering a student loan repayment (SLR) benefit (or any other Section 127 educational assistance benefit), companies have a lot of flexibility in how they design their benefits plans.
As long as they have a written plan that doesn’t favor highly-compensated employees and adheres to the rest of the guidelines outlined in Section 127 of the IRS tax code, companies can customize their plans however they want and can take advantage of many different levers in order to structure their benefit plan in a sustainable way.
Here are 5 ways companies can customize their student loan repayment programs to ensure their contributions have an impact on their employees’ financial well-being while also meeting the needs of the business:
Employer student loan repayments can be a powerful tool for retaining top talent. One common plan customization that companies can leverage to promote greater retention is tiered contributions based on tenure.
In other words, companies can scale monthly contribution amounts based on how long someone has worked at the company (e.g. $100 / month for employees who have worked at the company for at least a year; $200 / month for 2+ years; the maximum tax-free amount of $437.50 for 4+ years).
For part-time or hourly employees, companies can even calculate the tenure requirement based on a minimum number of hours worked.
At Highway Benefits, we’ve seen companies require that employees be continuously employed for at least 1 year (or even just 6 months) before they are eligible to receive a student loan contribution.
Have a particular department for which student loan repayments would be particularly meaningful? Maybe it’s your sales organization or customer success department. Maybe it’s that research org filled with people who took out extra loans for Masters degrees and PhDs (borrowers with graduate degrees can owe 2-3x as much as someone with an undergraduate degree; the average borrower with a Masters degree owes $71,318 while undergrads owe an average of $36,510. PhDs owe an average of $117,198-$201,736 depending on the degree type).
Companies can use department-based criteria to make a targeted impact on those employees with their SLR benefit. This can be a strong recruiting incentive for those crucial departments as well!
As with eligibility criteria based on department, companies can use eligibility criteria based on employee title to offer their student loan contributions to those who might value it most.
For example, a company may want to target roles typically filled by people who are 1-2 years out of undergrad or graduate school to help tackle student loan debt when balances are theoretically at their highest. In a situation like this, it may make sense for the company to limit contributions to associates, entry-level titles, or other similar titles.
Before including any custom eligibility rules based on an employee’s title or department though, companies should make sure that these rules won’t create a plan that favors highly compensated employees.
A highly compensated employee (HCE) is officially defined by the IRS as any individual who:
In order to be tax-compliant, 127 Plans must not discriminate in favor of these HCEs. To be clear, companies can still allow HCEs to participate in their SLR benefit plan, they just can’t exclusively offer this benefit to or cater the plan in an unfair way to HCEs.
To ensure their student loan contributions have the maximum impact, some companies may require that employees make their minimum monthly loan payment in order to be eligible for a contribution.
How does this help? When employees are making their minimum monthly loan payments on schedule, every additional dollar paid towards their loan principal can help them pay down their loan faster and save them hundreds to thousands of dollars on interest.
For example, on a $30,000, 10-year term loan with an interest rate of 5%, an employer contribution of $100 per month would help an employee pay off their loan almost 3 years faster and save them $2,468 in interest; even a contribution as low as $50 per month would still help an employee pay off their loan one year, 8 months faster and save them $1,457 in interest!
Check out our student loan paydown calculator to see how much faster your company can help someone pay off their student loan (and how much money you’ll help them save) with different contribution amounts.
An understandable business concern with benefits can be program costs. With lifetime benefit maximums, companies can cap the total amount that an employee can receive while enrolled in the benefit. Fidelity and McLaren Flint Hospital, for example, both cap their benefits programs at $15,000.
A benefit cap may make it easier to create a budget to keep your student loan repayments program sustainable in the long run.
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Highway Benefits makes creating and administering a flexible, tax-compliant 127 plan for SLR benefits a breeze with our turnkey student loan repayment benefit platform. Set up a demo today to learn more about the Highway Benefits advantage.
Disclaimer: This article is purely information and is not intended as financial or legal advice. For more in-depth questions on how to interpret US laws or the IRS Tax Code, we recommend you speak to a specialized attorney.
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