Employer Student Loan Repayment Under the CARES Act Explained
Learn how the CARES Act allows employers to make tax-free student loan payments on behalf of employees and what it means for tax reporting and compliance.
Student loan debt is a significant financial burden, and some employers are stepping in to help. The CARES Act introduced a provision allowing businesses to make tax-free student loan payments for employees, providing relief while offering tax advantages.
This benefit can be valuable, but specific rules must be followed. Understanding which loans qualify, how payments should be structured, and the tax implications involved is essential.
Eligible Loans Under the Program
Not all student loans qualify for employer repayment assistance under the CARES Act. The provision applies only to loans taken out for educational purposes that meet federal criteria. Private loans are not covered. Instead, the program focuses on federal student loans, including Direct Loans, Federal Family Education Loans (FFEL), and Perkins Loans. These loans are backed by the U.S. Department of Education and are eligible for federal repayment and forgiveness programs.
Parent PLUS Loans, which parents take out to fund their child’s education, also qualify. This means an employer can contribute tax-free toward an employee’s Parent PLUS Loan payments. However, if a federal loan has been refinanced into a private loan, it loses eligibility under this program.
Employer Requirements for Tax-Exempt Payments
To provide tax-free student loan repayment assistance, employers must establish an educational assistance program that complies with Section 127 of the Internal Revenue Code. This requires a written plan detailing the benefit’s terms and ensuring it is offered in a nondiscriminatory manner. The IRS defines a highly compensated employee as someone earning more than $150,000 in 2024, so companies must structure their programs accordingly.
Payments must be made directly to the loan servicer or reimbursed to the employee after proof of payment. Simply giving an employee extra wages to cover student loan payments does not qualify as a tax-free benefit and would be treated as taxable income. The tax exemption applies only to payments up to $5,250 per employee per year, a limit that includes any other educational assistance provided under the same program, such as tuition reimbursement.
Participation in the program must be voluntary and not tied to job performance. Conditioning the benefit on metrics like sales targets or tenure could jeopardize its tax-exempt status. Employees also cannot be given the option to choose between student loan repayment assistance and another taxable benefit, such as cash compensation, as this would trigger taxation under IRS rules.
Tax Reporting for Employers
Employers must properly report student loan repayment assistance to comply with IRS regulations. When structured correctly, these payments are excluded from employees’ taxable income but must still be documented in financial records and tax filings.
Qualifying student loan payments should not be included in employees’ Form W-2, Box 1 (wages, tips, and other compensation). However, companies must track these payments to ensure they do not exceed the $5,250 annual limit per employee. Any amount above this threshold must be treated as taxable wages and reported accordingly.
Businesses can deduct these payments as a business expense under Section 162 of the Internal Revenue Code, similar to other employee benefits. However, employers must maintain documentation proving payments were made under an established educational assistance program. Without proper records, the IRS could reclassify the payments as taxable wages, leading to additional tax liabilities and penalties.
Employee Tax Considerations
Employer-paid student loan assistance can provide financial relief, but employees should understand how it affects their tax situation. Since these payments are excluded from taxable income, they do not increase an employee’s adjusted gross income (AGI). This can be beneficial for individuals on income-driven repayment (IDR) plans or pursuing Public Service Loan Forgiveness (PSLF), as a lower AGI may reduce monthly payments under IDR calculations.
Employees should also consider how employer contributions impact their ability to claim the student loan interest deduction. Normally, individuals can deduct up to $2,500 in student loan interest per year if their modified adjusted gross income (MAGI) falls below the phase-out threshold—$75,000 for single filers and $155,000 for married couples filing jointly in 2024. However, since employer-paid amounts reduce the loan principal rather than being classified as interest payments, they do not count toward this deduction.
Documentation Requirements
Employers must maintain thorough records to ensure compliance with IRS regulations. Proper documentation protects businesses in the event of an audit and helps employees verify that payments were applied correctly.
Written policies outlining the educational assistance program’s terms should be retained, including eligibility criteria, payment limits, and the process for disbursing funds. Employers should also keep records of payment confirmations from loan servicers, detailing amounts paid on behalf of each employee. These records should align with payroll and accounting entries to confirm payments stayed within the $5,250 limit. Additionally, businesses should document employee acknowledgments confirming their participation in the program.