HR pros know that helping employees with debt, particularly student loan debt, is a key ingredient to building financial wellness in the workforce. With 44 million Americans carrying a total of 1.7 trillion in student debt, it’s the rare employer that doesn’t have a significant number of employees with substantial student loans.
Not surprisingly, many HR leaders are looking at how they may be able to help. In the Employee Benefit Research Institute’s 2022 Financial Wellbeing Survey, nearly three-quarters of employers said they currently offer or plan to offer student loan debt assistance or tuition reimbursement programs.
Despite the need and desire, implementing these benefits can be challenging. Recent legislative and executive actions concerning student loan repayment and forgiveness have been confusing. Employers are naturally wondering what role they should play in student debt repayment and what benefits can best help.
Here, we’ll look at two important student debt repayment benefits, how they work, and how they can best be implemented to attract and retain talented workers and enhance overall financial wellness among your employees.
Student Loan Repayment Benefits
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, employers can contribute $5,250 annually per employee toward tuition reimbursement or student loan payments on a tax-exempt basis. That means employees won’t pay income tax on contributions made by their employers toward educational assistance programs, yet the employer also gets a payroll tax exclusion on these funds.
Employers can make the payments directly to their employees’ student loan servicers or lenders, or they can provide them to the employees themselves, who can then put them toward their student debt.
The CARES Act provision was set to expire at the end of December 2020, but Congress passed the Consolidated Appropriations Act before that happened, extending the tax break through the year 2025.
Here’s what to consider when offering student loan repayment benefits.
How Much Will You Offer?
The maximum allowed annually on a tax-exempt basis is $5,250 per employee but employers do not have to provide that much. Many organizations start with a $50 to $100 a month payment. Even this seemingly small amount can help employees save thousands of dollars in interest over the life of the loan if directed toward the principal.
The amount you’ll contribute likely depends on the overall costs you are willing to dedicate to this benefit. An employee survey or other demographic data can help you determine how many of your workers carry student debt and would likely qualify for this benefit, which can help you understand the cost. In addition, you may want to look at future hiring trends for the next several years to estimate the number of new employees likely to join the program.
Will You Tie Benefits to Tenure?
Some employers require a time commitment — such as three to five years at the company — in exchange for the student loan payments. Others may simply delay the benefit for new employees for six months or a year.
In determining the qualification surrounding your program, you’ll need to weigh the immediate need for student loan relief among your workers and your need for higher retention and recruiting rates.
Is Your Paperwork in Place?
A program document outlining the design of the student loan contribution plan that complies with IRS regulations is necessary to implement this benefit.
You’ll also need to make sure this benefit works with any other existing qualified education assistance programs you may offer, such as tuition reimbursement.
The $5,250 tax-exempt limit applies to all tuition programs. So, if an employee receives reimbursement for a certification class, for example, and is eligible for student loan forgiveness payment for their undergraduate degree, the total of the two benefits per year for that employee cannot exceed $5,250. Anything above that amount will be considered taxable wages.
Matching Contributions for Student Loan Repayment
The Secure Act 2.0, which President Biden signed into law late in 2022, is designed to encourage more American workers to save for retirement. The act also formally authorizes matching contributions for student loan repayment, allowing companies to match employees’ qualified student loan payments with contributions to their retirement accounts, including 401(k)s, 403(b)s, SIMPLE IRAs, and government 457(b) plans.
Many HR leaders see the benefit as a win-win for employees. It allows them to pay down student debt while still participating in retirement savings, hopefully starting at an early age. The provision also benefits employers looking to offer a creative benefit to retain and recruit workers, as it removes many of the preexisting legal barriers and administrative complexities that discouraged some companies from adopting a student loan repayment feature.
Here’s what to know about the matching contributions for student loan payments program.
The Rules Are (Mostly) the Same for All Matches
A student loan matching benefit must abide by all the rules of a traditional match. This means that the eligibility criteria, matching contribution rate, and vesting schedule you apply to matching contributions on student loan payments must be the same as those you apply to elective deferrals.
There is, however, one small difference: You are allowed to deposit the matching contributions to the employee’s 401(k) plan account less frequently than regular matching contributions, as long as you contribute at least annually.
Only Qualified Student Loan Payments are Eligible
Student loans must be qualified for repayments to be matched. That generally means any loans borrowed solely to pay for higher education expenses for the employee, their spouse, or a dependent. This includes refinanced student loans but not loans from a relative or retirement plan.
Loans eligible for repayment must have been used to pay for qualified education expenses including tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time.
To receive a match, employees simply need to certify annually that they have made qualified student loan payments and the amount of these payments. Plan sponsors are allowed to rely on an employee’s certification and do not need to conduct an independent evaluation as to whether the payments meet all of the requirements to be qualified student loan payments.
The match becomes available in 2024 for plan years starting after December 31, 2023. This gives employers some time to research employee needs and draft a plan. It also provides time for the IRS to offer some additional details on the implementation and administration of the matching provision.
Benefits that can help ease the burden of student debt are important tools employers can utilize to recruit and retain talent and promote financial wellness among employees. This is especially important now that the payment pause implemented during the pandemic is ending and workers will once again be facing monthly student loan payments. Student loan repayment and matching contribution programs are two benefits employers may want to consider in this current environment.
SoFi at Work can help. We’re experts in the student lending space. With SoFi at work you have access to platforms and information that will help build the benefits you need to create a successful and loyal workforce.
Are student loan payment benefits tax-exempt?
Yes, with some qualifications. The CARES Act allows employers to provide up to $5,250 annually per employee for student loan repayment on a tax-exempt basis through 2025.
Can employers offer student loan payment matches in retirement accounts?
Yes, a provision in Secure 2.0 (legislation signed into law in 2022) allows companies, starting in 2024, to match a worker’s student loan payment in the form of a contribution to their workplace retirement plan.
What are the advantages of student debt repayment benefits?
Student loan repayment benefits can help attract and retain talented workers. They can also increase productivity among your employees by reducing the stress created by burdensome student debt and boosting overall financial wellness.
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