For a long time, employers and employees have been able to take advantage of a special tax break on tuition and certain types of tuition-related assistance that has offered a boost to companies’ employee benefits programs.  Under Section 127 of the Internal Revenue Code, employees are not taxed on the first $5,250 of payments made by employers each year as part of an employer’s qualifying “educational assistance program.” Traditionally, an “educational assistance program” under Section 127 has meant an employer’s written plan for the payment of expenses incurred by or on behalf of an employee for the employee’s education, “including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment.”  Many companies have sponsored such programs over the years, paying or reimbursing these costs for employees who choose to further their education as one way to help advance their careers.

It would be understandable to have assumed that employer payments toward employees’ existing student loan debt, accumulated prior to employment, could be considered “similar payments” to tuition, and therefore tax-free to employees under this part of the Code.  But that actually was not the case until Congress acted and passed two temporary measures as part of its pandemic-related legislation in 2020. Until 2026, employer payments of principal or interest on an employee’s “qualified education loan” may be eligible for tax-free treatment up to the $5,250 annual maximum under Section 127.

Perhaps due to the temporary nature of this tax-free employee benefit, or a general lack of awareness of it, the “qualified education loan” addition to educational assistance programs seems to have landed with relatively little fanfare.  The Society for Human Resource Management (SHRM) reported in June 2022 that only 17% of employers surveyed by the Employee Benefit Research Institute had offered employees assistance with their student loan debt.  (As practicing ERISA attorneys, we also have seen firsthand the hesitation from some employers to wade into the area of student loans for one reason or another.)

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