The $2.2 trillion Cares Act stimulus bill President Trump signed into law Friday includes required minimum distribution and early withdrawal penalty waivers directly related to 401ks, but it also includes a new student loan repayment benefit for employees that can help them start saving for retirement earlier.
Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law.
The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021. Full details can be found in section 2206 of the bill.
The provision stems from a bipartisan proposal that has been circulating on Capitol Hill for the last few years. Tax relief for employer-sponsored student loan repayment was introduced by Reps. Rodney Davis (R-IL) and Scott Peters (D-CA) and Sens. Mark Warner (D-VA) and John Thune (R-SD) as the Employer Participation in Repayment Act.
While some critics have said it will provide new tax benefits to financially secure, well-off borrowers who don’t need the help, the legislation had strong industry support from those looking to help employees repay their student debt. Goodly and Tuition.io, a pair of companies focused on tackling the employee student loan debt issue, both reached out to 401k Specialist to discuss this aspect of the bill.
Both companies praised Congress for passing the coronavirus stimulus bill and its inclusion of the tax break for student loan payments made by employers.
“We applaud the government stimulus bill for including a provision on income tax exclusion for individuals who are receiving student loan repayment assistance from their employer,” said Scott Thompson CEO, Tuition.io. “Providing a tax subsidy for employer student loan repayment doesn’t just benefit individual workers, it will help reduce a major drag on the overall economy as we recover from the COVID-19 shock. Even if only temporary, this groundbreaking legislation will enable companies large and small to help America’s working people make it through this historical crisis.”
Gregory Poulin, co-founder and CEO of Goodly, a San Francisco-based tech company that partners with employers to offer student loan repayment as an employee benefit, called employer-sponsored student loan repayment a “win-win” for employees and the economy.
“As we’re witnessing the worst national health crisis in more than 100 years and unprecedented economic volatility, one key to supporting employees is to help with their student loans and the Cares Act provides employers a powerful opportunity to make a meaningful impact on the financial wellbeing of their employees,” Poulin told 401k Specialist.
Poulin, whose passion for the issue came from his own personal experience with student loans (“After my father passed away unexpectedly, I had to borrow $80k to pay for my education at Dartmouth. My monthly payment is now $900,” he says), adds that 63% of U.S. employers already provide some level of tax-free tuition assistance, which allows their employees to receive up to $5,250 per year toward qualified education expenses.
“The Cares Act simply amends Section 127 of the tax code to incorporate provisions of The Employer Participation in Repayment Act. This provision of the Cares Act allows employers to pay up to $5,250 of an employee’s student loan debt on a tax-free basis,” Poulin says.
The provision “levels the playing field and makes access to tax-free employer education assistance fair and equitable for all employees,” he says.
Poulin reiterates it is important to remember that $5,250 is a combined limit, meaning employers that offer tuition reimbursement and student loan repayment programs have a cap of tax-free support at $5,250 per employee.
“And, most importantly, employer contributions toward student loans must be made by January 1, 2021 for those payments to be tax exempt,” Poulin says. “Payments made before the enactment of the Cares Act or after January 1, 2021, by the employer toward their employees student loan will be counted as taxable income for the employee.”
Student Loan Crisis and Legislative Changes
The burden of student loans has topped $1.6 trillion, with the average individual holding nearly $30,000 of debt. That’s more than the total credit card debt or total auto loan debt, according to the New York Federal Reserve.
Before the COVID-19 pandemic hit, the effect on borrowers was profound with many putting off major life milestones such as saving for retirement or buying a house. In 2019, more than 11 million Americans were past due or in default on a student loan.
The impact of COVID-19 on the economy has been swift and unprecedented, further stifling workers and employers who were already feeling the pressure of financial stress.
The new legislation takes effect immediately, and companies like Goodly and Tuition.io are eager to help employers act quickly to bring student loan repayment benefits and support to employees already feeling the stress.
Goodly has seen an unprecedented increase in demand from employers looking for ways to support their employees with student loans during the COVID-19 outbreak, Goodly says, and in response, the company is offering its platform for free for new clients for three months.
Poulin says he is “extremely confident” Congress will act to make the Employer Participation in Repayment Act permanent, noting how the bill has 64 co-sponsors in the Senate and 270 in the House, and that President Trump has said he will sign it into law if Congress passes it.
Suspends Payments
In addition to the Cares Act’s student loan repayment benefit for employees, the bill also includes a provision that borrowers will not have to make any student loan payments for six months (through Sept. 30, 2020) on federal student loans.
This extends the two-month pause that President Trump had previously announced for student loan payments.
While the loans will have to be repaid, interest during the six-month period will be waived entirely. Only certain federal student loans are eligible; private student loans are not eligible.
Involuntary collection of defaulted student loans, including wage garnishment and claiming of tax refunds, will also be suspended under the Cares Act.