Changes to Employer Provided Education Assistance Due To COVID-19

Margaret Amsden

The COVID-19 pandemic has an impact on both businesses and individual taxpayers.  As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, opportunities exist for employers to help their employees in multiple ways. One such opportunity relates to the change made to the Education Assistance Program. This change provides incentives for both employers and employees looking to reduce their tax bill and increase cash flow.

Employer Education Assistance before CARES:

• Education assistance was only exempt from the employee’s gross income for items such as tuition and fees relating to an employee’s education.
• Limited to the first $5,250 of educational assistance.

Employer Education Assistance after CARES:

• Education assistance is expanded to include student loan repayment made by December 31, 2020
• Payments to student loans can be applied to principal or interest; however, CARES explicitly states that individuals are not allowed to deduct the interest portion as an above the line-deduction on their individual tax return to the extent paid by their employer
• Exclusion from income continues to be limited to the first $5,250 of educational assistance.

How does this benefit the employer?

• Reduces their payroll tax liability on payments to employee’s student loans up to $5,250
• Reduces their Federal and State taxable income by $5,250 as the payment to an employee’s student loan qualifies for a deduction
• A recruiting tool to acquire top talent

How does this benefit the employee?

• Reduce employee’s payroll tax burden on exempt wages up to $5,250

Reduce employee’s Federal and applicable State and Local Income Taxes by the employee’s marginal tax rate on the loan repayment

• As defined by IRC Section 221(d)(1), qualified education loans include indebtedness which is incurred on behalf of the taxpayer, taxpayer’s spouse, or any dependent of the taxpayer
• CARES also temporarily suspended all Federal Student Loan payments and the accrual of interest until 09/30/2020 and, as a result, these payments may be directly applied only to the principal

Providing tax-free educational assistance provides tax-saving opportunities for both employers and employees. CARES only allows employer payments to qualifying student loans to be excluded from an employee’s gross wages until December 31, 2020. So, if you are interested in providing your employees with this additional benefit, you will need to act quickly.  Please reach out to us if you need any additional assistance in this area.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.