CWG Insight Series: CARES ACT Provides Student Loan Payment Opportunity for Business Owners

When Congress passed the $2trillion CARES ACT emergency relief plan, most focused on the direct stimulus checks, unemployment benefits and Paycheck Protection Program (PPP) loans, which were all widely covered by the media.  There are many other provisions that can be utilized, and today we’ll cover a planning opportunity for business owners who personally have student loans and/or whose employees do.

Much has been written about provisions in the CARES Act that support student loan borrowers. Particularly, the provision enabling student loan borrowers to pause payments and interest on their student debt for close to 6 months. This is recognized as an effective way to free up much-needed cash during this period of economic uncertainty.

What has largely been overlooked is part of the CARES Act that allows employers to make tax-free contributions directly to employee student loans. This allows employers to help their employees pay down student debt faster and save a significant amount of money on student loan interest over time.

Prior to the passing of the CARES ACT, if an employer made a payment towards an employee’s student loan, the amount of the payment was added to the employee’s income.  The employee paid income and employment taxes (social security and Medicare) and the employer paid their share of the employment taxes.  The after-tax loan payment ends up being much smaller than the intended benefit for the employee and the cost to the employer is higher.

The CARES ACT provides for tax-free student loan payments of up to $5,250 per employee through December 31, 2020.  The employee does not report the payment as income, thus eliminating the income and employment taxes.  The employer does not pay their side of the employment taxes and gets to count the payment as a full deduction.  This would be a great way to reward your employees, and if you personally have student loans, to tax efficiently pay them down.  

To take advantage of this opportunity, a Section 127 Plan needs to be set up for the company, outlining the benefits offered and the eligibility requirements.  If you are interested in taking advantage of this opportunity, please reach out to your Crown advisor so we can coordinate with your CPA on how to best implement before year end.