A growing number of organizations are adding student loan repayment solutions to their benefits lineup. While expanded tax benefits for both employers and employees are a big part of the allure, HR leaders also understand the broader implications.
The tax advantages are one thing. But instituting these programs can also help correct the productivity drain that employees’ financial pressures can cause and also boost recruitment and retention. The trick is to step carefully in setting the programs up to avoid potential compliance pitfalls.
Student Loan Debt Contributes to Employee Financial Stress
Student loan debt has climbed to a staggering $1.7 trillion, and the 44 million Americans who hold it are pressured at some level because of it. It’s an obligation that limits potential, delaying decisions to start a family, buy a home, or save sufficiently for retirement.
The burden is a major cause of people’s financial stress, and that also affects their work performance. Related productivity losses through absenteeism and presenteeism cause employers to lose 47 hours per employee each year.
Before the coronavirus pandemic, one survey of HR executives found that only 8% of employers helped their employees with their student loan repayments. That’s because the assistance was treated as taxable income. The survey also found that as many as one-third of companies would offer student loan repayments as a benefit if the tax issue was addressed.
It took the pandemic to make that happen.
Particulars of Tax Changes for Student Loan Contributions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and two subsequent relief bills expanded Section 127 tax code provisions for education expenses to now include student loan debt. This allows employers to contribute up to $5,250 annually to an employee’s student loan debt (or other education expenses such as tuition reimbursement), tax-free, for what has now been extended to a 5-year period through December 31, 2025.
What this means for employees is savings of as much as 30% on state and federal taxes, depending on an individual’s tax rate and the deductibility of the loan interest. For employers, as much as 10% may be saved in Federal Insurance Contributions Act (FICA)/Federal Unemployment Tax Act (FUTA)/State Unemployment Tax Act (SUTA), depending on the tax rates of the state where they are located.
Organizations that haven’t yet acted can adopt a written Section 127 plan to add a program to their lineup of benefits or amend the plan to specify the employer contribution. Any federal tax code-qualified education loan incurred by an employee for his or her own benefit is eligible.
In proceeding, it’s important to avoid potential discrimination pitfalls. Contributions can be set at different levels according to the class (which must be nondiscriminatory as defined by the Internal Revenue Service (IRS)) and tenure of an employee, for example. But they can’t be directed exclusively to highly compensated employees or those whose ownership in the company surpasses 5%.
Tailoring a Student Loan Repayment Program
For those employers that haven’t yet added a program to their benefits programs, now’s the time to jump. HR leaders should apply a strategic lens to ensure an approach that serves everyone’s interests most effectively. The program structure should help them focus in on loan servicers that specialize in this market.
For example, a comprehensive approach would be to look at employee education as a bigger issue and combine student loan assistance with tuition assistance. Before the changes for student loan contributions, tuition assistance had been tax-exempt; the HR executive survey (above) found that 56% of employers provided it.
Another consideration is whether to incorporate financial and budgeting coaching into the program. While some of the student loan vendors provide these services, this sort of coaching is worth considering as a benefit for all employees, given the poor financial health of many Americans. In fact, over three-fourths of workers don’t think they’re knowledgeable about their financial wellness, and 62% of them would appreciate help from their employers in addressing it.
Our student debt burden fosters the growing skills gap that threatens our economic prosperity over the long term. Employers can now more easily be part of the solution.
Heather Garbers, CVBS, is vice president of voluntary benefits and technology for Hub International.