Peanut Butter Student Loan Repayment plans can now be offered tax-free to help employers attract essential workers and retain critical college-educated staff.
A shorter version of this article was issued as a press release on Tuesday, March 31, 2020.
Signed into law on Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, “CARES Act”, or “Stimulus Bill”, specifically Sec. 2206(B)), includes tax incentives when employers choose to offer student loan repayment as a benefit.
Until at least January 1, 2021, companies can now provide tax-free student loan contributions that directly reduce employees’ student debt. Prior to the CARES Act, employer-sponsored Student Loan Repayment functioned as a taxable benefit, requiring the employer to pay payroll taxes and to withhold income taxes for employees.
Text previously drafted in the Employer Participation in Repayment Act (H.R. 1043/S. 460) is included in Section 2206 of the Stimulus Bill and allows employers to contribute up to $5,250 in tax-free dollars annually towards employees’ student loans under a Section 127 plan.
Peanut Butter has been actively involved in the advancement of this legislation for more than four years.
Congressman Rodney Davis (R, IL-13) visits Peanut Butter’s headquarters on March 4, 2016, to meet with CEO David Aronson. The two, along with Rep. Davis’s colleagues in the House and Senate, would partner to introduce legislation in 2017 and again in 2019 that was ultimately included in the CARES Act.
Prior to the CARES Act, employer-sponsored Student Loan Repayment functioned as a taxable benefit, requiring the employer to pay payroll taxes and withhold income taxes for participating employees.
As a taxable benefit, Student Loan Repayment has helped top employers in every industry hire 13% faster and retain talent 36% longer. Employers also leverage Student Loan Repayment to improve diversity and enhance culture in the workplace.
Student debt is a burden that affects more than 45 million college-educated Americans. As we enter a time of increased economic hardship brought on by the global coronavirus pandemic, this burden becomes even more crippling. And in many industries, the immediate need for college-educated workers — including nurses, pharmacists, facility managers, and many others — has become even more dire.
Peanut Butter’s comprehensive Student Loan Assistance platform provides a digital enrollment for Student Loan Repayment, complete with loan verification, support, payment remittance, and tracking/reporting, while also providing employees/borrowers with financial wellness tools to optimize their loans.
Enabling tax-free contributions requires two steps:
- First, employers adopt a section 127 plan, or amend an existing 127 plan, thereby incorporating the Student Loan Repayment plan.
- Once the plan is in place, the company’s contributions can then be recorded on payroll tax-free.
By offering Student Loan Repayment tax-free, employers will:
- Make a greater impact on employees’ financial futures, since State and Federal income taxes will no longer need to be withheld for your contributions; this tax savings of ~$0.30/dollar goes directly to the employee’s bank account.
- Save on payroll taxes, since your company will no longer need to withhold FICA, FUTA, SUTA for its student loan contributions; this tax savings stays on the company’s balance sheet and improves earnings.
- Need to comply with Section 127 requirements from the IRS.
The time is right:
Top employers in every industry already offer Student Loan Repayment to attract, retain and engage talent. And it’s likely that the number of employers offering the benefit will grow exponentially now that it’s become more tax efficient for companies to pay down loans than it is for employees to do it themselves.
With the CARES Act now signed into law, if an employee wants to pay $1.00 to her student loan, she’d need to earn $1.43 (assuming a combined 30% tax rate for Federal and State income).
In contrast, if her employer wants to pay $1.00 to her student loan under a 127 plan, the company only needs to pay $1.00.
In the coming weeks, many of the 40 million employed American workers with student loans will begin asking their employers to offer Student Loan Repayment, so that their loans can be paid down faster, and without the burden of State or Federal income tax.
“Employer-sponsored Student Loan Repayment has always been a smart way to align interests between taxpayers, employers and student loan borrowers,” Peanut Butter CEO David Aronson said. “And in the midst of the coronavirus pandemic, it will provide an attractive incentive for Americans to work our way forward, together.”
We’re in this together:
In about an hour, your company can stand out, along with other leading employers, by providing your team members with resources to manage their student debt and by contributing to the repayment of their loans.
- Clients: If you are currently offering Student Loan Resources or Student Loan Repayment and would like to enable tax-free contributions, click here to schedule a call with your Peanut Butter customer success manager.
All Peanut Butter clients will receive a sample amendment to a 127 plan or a sample 127 plan document that their lawyer can review/approve.
- Employers: If you’d like to set up a Student Loan Repayment plan for your company, click here to Get Started, or click here to join an upcoming webinar.
- Brokers and Partners: If you’d like to help a client set up a plan or receive a proposal, click here to Get Started, or click here to join an upcoming webinar.