Employers Could Offer Tax-free Help with Student Loan Payments

With the fall college semester now underway, the Internal Revenue Service (IRS) reminded employers and employees that under federal law, employers who have educational assistance programs can use them to help pay student loan obligations for their employees.

As part of a wider effort to promote this benefit, the IRS will hold a free webinar on September 14 to help interested taxpayers and tax professionals better understand this special provision.

IRS Commissioner Danny Werfel said, “There is a limited window of time for this educational assistance program, and the IRS wants to make sure employers don’t overlook this option that can help businesses attract and retain workers.”

Though educational assistance programs have been available for many years, the option to use them to pay student loans has been available only for payments made after March 27, 2020, and, under current law, will continue to be available until Dec. 31, 2025.

Traditionally, educational assistance programs have been used to pay for books, equipment, supplies, fees, tuition, and other education expenses for the employee. These programs can now also be used to pay principal and interest on an employee’s qualified education loans. Payments made directly to the lender, as well as those made to the employee, qualify.

By law, tax-free benefits under an educational assistance program are limited to $5,250 per employee per year. Normally, the assistance provided above that level is taxable as wages.

Employers who don’t have an educational assistance program may want to consider setting one up. In a tight labor market, worthwhile benefits such as educational assistance programs can help employers attract and retain qualified workers.

These programs must be in writing and cannot discriminate in favor of highly compensated employees. For information on other requirements, see Publication 15-B, Employer’s Tax Guide to Fringe Benefits. For details on what qualifies as a student loan, see Chapter 10 in Publication 970, Tax Benefits for Education.

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