SHRM-Backed Bill Would Give a Tax Break for Student Loan Repayment Aid

Legislation would remove an obstacle to student debt relief benefits

Stephen Miller, CEBS By Stephen Miller, CEBS February 13, 2019
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In February, lawmakers reintroduced legislation that would make the money employers give workers to repay their student loans tax-exempt.

The Society for Human Resource Management (SHRM) backs The Employer Participation in Repayment Act (H.R. 1043), which is co-sponsored by a bipartisan group of 100 House members. A companion bill (S.460) was reintroduced in the Senate with 18 co-sponsors.

The legislation would let employers give tax-free student loan assistance up to $5,250 a year per employee. That's the same amount that Section 127 of the tax code now treats as tax-exempt for employer-provided tuition assistance.

"Expanding employer education assistance helps address the skills gap, which is holding back both workers and employers," said SHRM President and Chief Executive Officer Johnny C. Taylor, Jr., SHRM-SCP. "When employers are able to help workers pay off student debt, more people will have confidence to pursue higher education and be better prepared to fill high-skilled fields."

"An obstacle to providing student loan repayment as a benefit is that the payments are considered taxable income for the recipients, and employers can't claim a deduction for these payments," explained Chatrane Birbal, SHRM's director of congressional affairs for health and employee benefits policy. The proposed legislation, in contrast, would give employer-provided student loan repayments the same tax advantages as provided by Section 127 tuition assistance.

Full text of the legislation can be found here. A summary of the legislation can be found here.

According to SHRM's 2018 Employee Benefits survey of more than 3,500 HR professionals, just 4 percent of organizations offered taxable financial aid to help employees repay student loans. In comparison, about half of organizations provided tax-exempt undergraduate or graduate educational assistance.

An employer contributing $100 per month would help an employee with $26,500—the median amount borrowed for a bachelor's degree—get out of debt three years faster, saving over $10,000 in principal and interest over 10 years assuming a 4 percent interest rate, according to Gradifi, an employee-benefit student loan repayment platform.

[SHRM members-only toolkit: Designing and Managing Educational Assistance Programs]

Meeting a Pressing Need

A 2018 analysis by the Center for Retirement Research at Boston College found that college graduates with student loans save less for retirement by age 30 compared to graduates without debt, creating a savings shortfall that can be difficult to make up. Last year, the nonprofit National Institute on Retirement Security reported that, based on U.S. Census data, about 66 percent of working Millennials between ages 21 and 32 had nothing saved for retirement.

"Many employers have successfully helped their employees pay down their debt, and encouraging similar programs across the country can move us closer to solving the student debt crisis," stated Rep. Scott Peters, D-Calif., a co-sponsor of the legislation. 

"Student loan debt is such a major issue that some private companies have found that offering a benefit to help employees pay down their student loans has allowed them to recruit and retain young talent," said co-sponsor Rep. Rodney Davis, R-Ill. "Our bill simply builds on this private-sector approach to addressing the student loan debt crisis in this country by allowing this benefit to be tax-free to both the employee and the employer."

"SHRM has long advocated for legislation that would allow employers to provide student loan repayment assistance with pretax dollars," Birbal said. "Benefit offerings that meet the needs of the modern workforce will create better workplaces and a better world."

On March 20, participants in SHRM's 2019 Employment Law & Legislative Conference Advocacy Day on Capitol Hill will be asking congressional representatives to support this proposal.

Different Benefit Designs

Employers that provide student debt relief typically will match loan payments that employees make through paycheck deductions, although some employees are using more innovative approaches, some of which seek to avoid the taxes triggered when an employer gives funds directly to employees to help pay off their student loans.

Last year, for example, Abbott Laboratories launched a program to aid employees who contribute at least 2 percent of their eligible pay to their student loans through payroll deduction. These employees can receive an amount equivalent to the company's 401(k) match—5 percent of the employee's compensation—deposited to their 401(k) accounts even if they don't otherwise contribute to their 401(k).

"If the employer simply pays a portion of the employee's student loan debt, that results in taxable W-2 wages to the employee," said attorney Elizabeth Thomas Dold, a principal with Groom Law Group in Washington, D.C. "Conversely, if the employer makes a contribution to a tax-qualified retirement plan to encourage participants to repay these debts, there is generally no taxation until retirement" on employer contributions, subject to annual IRS limits.

The IRS approved of Abbott's student loan benefit plan in a private letter ruling last year, although broader IRS guidance is still to come. Among issues to be addressed, the letter ruling approved a specific plan design with a regular 401(k) match and a student loan repayment match that were subject to nondiscrimination testing, leaving it unclear if a plan with a 401(k) safe harbor design, such as one depending on matching contributions to satisfy an actual deferral percentage (ADP) testing safe harbor, would pass the same muster with the IRS, benefits consultants said.

In January, insurance firm Unum announced it will let employees exchange unused paid time off for payments against their student loans, beginning next year. Employer loan-repayment dollars would still be taxable under this method, however, unless Congress changes the current law.

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