Tax breaks for employers can help ease student debt.

In light of the economic instability caused by the coronavirus, many young professionals are seeking financial security through stable employment.  And many business owners are looking for incentives to help attract, retain and reward their young talent encumbered by student loan debt.

The CARES Act, Section 2206 offers an opportunity that benefits both employees and employers. Until the end of this year, employers can pay up to $5,250 toward an employee’s student loans tax-free.  Traditionally, these payments are treated as wages, but until December 31, 2020, these payments are excluded from income and payroll taxes – benefiting both the employer and those receiving the repayment assistance.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th in response to the global pandemic. Initial coverage of the bipartisan law was dominated by small business assistance and stimulus payments. This new tax break is thanks to a less-highlighted provision which temporarily pauses payment and interest on most federal student loans to lighten the debt burden for young workers.  

Payments are excluded from an employee’s taxable income, and they are excluded from payroll taxes and tax deductible to the employer. The CARES Act states that these payments must be made before December 31, 2020. Now an employer can provide even greater relief by contributing up to $5,250 either paid directly to the financial institution holding the debt, or to reimburse the employee for payments.

Employees should be aware that interest payments made via a Section 2206 payment are not eligible for the student loan interest deduction that they may take on their income taxes (depending on eligibility). If this is a concern, employers can avoid this limitation by directing the payments exclusively to the loan’s principal balance.

Because of the government’s efforts to ease the financial chaos caused by the coronavirus, employers have a tax efficient way to strengthen employee loyalty and reward high performing employees. And the young employee recognizes his value and contribution to the company while benefitting from repayment assistance. Clearly a win-win for everyone.

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