The new CARES Act signed into law on March 27, 2020, provides for employers to pay an employee’s student loans tax-free.
Historically, employers could pay up to $5,250 toward an employee’s educational assistance (tuition/books/fees). That payment was income to the employee on their W2. However, the new CARES Act, under Section 2206, provides a provision that enables employers to provide a student loan repayment benefit to employees on a tax-free basis.
Under the change, an employer may contribute up to $5,250 annually toward an employee’s student loans, and (the big difference is) the total will be excluded from the employee’s income. The cap is still $5,250 in total for both student loan repayment and educational assistance paid by the employer. This new provision applies to any student loan payments made by an employer on behalf of an employee after March 27, 2020, and before January 1, 2021.
This is a win-win for both the employer and employee. If you chose to adjust your employees gross pay by this $5250 educational assistance, that will save the employer 7.65% FICA tax (approx. $400), and save the employee 7.65% FICA tax PLUS their effective tax rate…as they would be paying the student loan with after-tax money, historically. So an employee with an effective tax rate of 15% + 7.65% FICA, the employee would be saving 22.65% (or approx. $1190). By lowering their gross salary and opting to pay their (historically) after-tax student loan payment (or current tuition/books/fees), this helps save money for both parties and a win-win for everyone involved.