Employer student loan repayments: Tax-free until January 1, 2026

The Brief History of Tax-Free Employer Student Loan Repayments

Employer student loan repayments (SLR) are not a new idea, but it wasn’t until recently that this benefit began gaining popularity thanks to new legislation that makes offering student loan repayments tax-free for companies until January 1, 2026. 

If you’re curious as to how exactly SLR benefits became tax-free, jump ahead! We’ll dive into how:

• Section 2206 of the Cares Act made employer student loan repayments tax free 
• The existing provision, Section 127 of the Internal Revenue Tax Code, was expanded for employer student loan repayments
• The Consolidated Appropriations Act extended tax-free employer student loan repayments through 2025
• It all tied together to pave the way for tax-free employer student loan repayments as a benefit
• And finally, if student loan repayment benefits will remain tax-free

How did Section 2206 of the CARES Act make employer student loan repayments tax-free?

In March of 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide $2.2T in economic stimulus and pandemic relief to millions of Americans. The CARES Act is widely known for providing stimulus checks and pausing federal student loans, but not many people are aware that also embedded in the legislation was the first key provision that would make employer student loan repayments tax-free until the end of 2020.

Section 2206 of the CARES Act, entitled “SEC. 2206. EXCLUSION FOR CERTAIN EMPLOYER PAYMENTS OF STUDENT LOANS” amended Paragraph (1) of section 127 (c) of the Internal Revenue Code (the definition of “Educational Assistance”) to include the following language: 

(B) in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, [...] 

The legalese can be dense, but essentially, this expanded an existing provision for tax-free employer-sponsored educational assistance in the IRS tax code to also include “qualified education loans” until the end of 2020. 

How was the existing provision, Section 127 of the Internal Revenue Tax Code, expanded for employer student loan repayments?

Prior to the passage of the CARES Act, Section 127 of the IRS Code already allowed employers to offer up to $5,250 in tax-free “Educational Assistance” per employee per year.
At the time, “Educational Assistance” was defined as “(A) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment),”

The CARES Act simply expanded the definition of “Educational Assistance” to cover employer student loan repayments made before Jan 1, 2021. Later the Consolidated Appropriations Act would extend this coverage further.  

How did the Consolidated Appropriations Act (CAA) of 2021 extend tax-free employer student Loan repayments through 2025?

In Dec 2020, Congress passed the Consolidated Appropriations Act (CAA) of 2021 and extended the tax-free status of employer student loan repayments that was originally granted by the CARES Act. 

How? Simple. Section 120 of Division EE of the CAA amended the language from the CARES act to cover employer repayments made before January 1, 2026 (instead of January 1, 2021). 

SEC. 120. EXCLUSION FOR CERTAIN EMPLOYER PAYMENTS OF STUDENT LOANS

(a) IN GENERAL.—Section 127(c)(1)(B) is amended by striking ‘‘January 1, 2021’’ and inserting ‘‘January 1, 2026’’.

Pretty straightforward!

So how do the CARES ACT, Consolidated Appropriations Act, Section 127 of the IRS Tax Code, and Employer Student Loan Repayments all tie together? 

Thanks to the expansion of Section 127 of the IRS Tax Code, Companies can now offer student loan repayments as a tax-free benefit for their employees through 2025, as long as they:

• Have a written educational assistance plan (also called a “127 plan” or “127c plan”) 
• Notify all employees about the benefit plan
• Do not discriminate in favor of highly compensated employees 
• Do not allow company owners to to receive more than 5% of the total benefit
• Do not allow employees to swap or choose other taxable benefits instead of the educational assistance benefit 
• Do not exceed $5,250 per employee per year in qualified educational assistance 

…among other requirements. 

Will Employer Student Loan Repayments remain tax-free after 2025? 

Time will tell, but we’re optimistic. When Section 127 of the Internal Revenue Code was first introduced in 1978, it was created as a temporary, expiring tax-benefit. Thanks to the dedicated efforts of business, education, and labor groups, the long-standing tax benefit continued to be extended until it was made permanent in 2012, providing a precedent for employer student loan repayments to become permanent too.  

One final hopeful note: prior to the pandemic, there was already some push for expanding Section 127 of the IRS tax code to include employer student loan repayments. If Congress passes the Employer Participation in Repayment Act (introduced in 2019), we could see employer student loan repayments become permanently tax-free!

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If you are an employer looking to offer an SLR benefit to your company, Highway Benefits can help you create and administer a sustainable, flexible, and fully tax-compliant benefit plan. 

Highway’s turnkey platform makes it easy to launch your benefit in as little as two weeks and takes care of all the administrative lift so that you can help ease the financial burden of student debt on your people, without adding more work to your plate. Talk to our team today to learn more!  

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‍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 Tax Attorney.