Small business employers have a hard time finding and retaining good talent. One benefit that is sometimes overlooked is the education assistance that can be offered tax free to employees as payments towards qualified student loans.
Exclusion from wages of employer payments of student loans
The CARES Act of 2020 included provisions under which employers can exclude from wages up to $5,250 in payments made after March 27, 2020, and before January 1, 2026, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for education of the employee. Exclusion from wages means the employee doesn't pay income tax and the employer doesn't pay payroll taxes on these payments.
Educational assistance program – Sec 127
A Sec 127 educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only if all of the following tests are met.
The program benefits employees who qualify under rules set up by you that don't favor highly compensated employees.
The program doesn't provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
The program doesn't allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
You give reasonable notice of the program to eligible employees.
For this exclusion, a highly compensated employee for 2022 is an employee who meets either of the following tests.
The employee was a 5% owner at any time during the year or the preceding year.
The employee received more than $130,000 in pay for the preceding year.
For this exclusion, treat the following individuals as employees.
A current employee.
A former employee who retired, left on disability, or was laid off.
A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
Yourself (if you’re a sole proprietor or partner in a partnership).
Please contact us if you have questions or need further guidance.