Bill Seeks to Allow Tax-Free Student Loan Repayments by Employers

Expanding tuition assistance programs could help with recruitment, retention

Allen Smith, J.D. By Allen Smith, J.D. February 10, 2017
Bill Seeks to Allow Tax-Free Student Loan Repayments by Employers

​Tax-free employer repayments of student loans would be available for the first time under a bill introduced by Rep. Rodney Davis, R-Ill. Employers now can offer tax-free tuition reimbursement only, not tax-free student loan repayment. 

The Society for Human Resource Management (SHRM) supports the bipartisan bill, which would amend Section 127 of the Internal Revenue Code. The bill, introduced Feb. 1, has 23 co-sponsors.

Section 127 currently allows an employee to exclude from taxable income up to $5,250 per year in employer-provided educational assistance. The benefit covers tuition, fees, books, supplies and equipment. Employers are not required to provide assistance under Section 127. But if an employer does, the benefit must be offered to all employees and not just to highly compensated workers.

Expanding Section 127 to include student loan repayments "would assist employers in attracting employees—many of whom are Millennials—to their workplace," said Kathleen Coulombe, SHRM senior advisor, government relations.

Section 127's tax-free tuition reimbursement amount of $5,250 per year for each participating employee has never been raised nor is it indexed. "Many employers and stakeholders feel that this amount should be increased," she said.

While SHRM supports the bill for making student loan repayment reimbursable, if the bill passes, the total amount each employer could choose to offer per employee each year would remain at $5,250. That includes both student loan repayment and tuition assistance. So, the bill would not address employers' desire to increase the overall amount.

The bill, H.R. 795, has been referred to the House Ways and Means Committee. While the likelihood of its enactment is at this point unknown, Coulombe said, "Both Republicans and Democrats alike see the value in incentivizing student loan repayment. Expanding Section 127 is a natural fit, whereby employers are able to offer a unique, flexible benefit, and employees are able to offset the cost of education and training."

"Educational expenses have gone through the roof," said Bob Christenson, an attorney with Fisher Phillips in Atlanta. Saddled with student loan debt, many young college graduates live at home because they can't afford rent, he noted.

Section 127 tuition assistance became a permanent part of the tax code in December 2012.

Eligibility Conditions

Employers can impose eligibility conditions for participation in a Section 127 program, such as job categories, full-time versus part-time status, length of employment and continued employment during the participation in the education, said Tiffany Downs, an attorney with FordHarrison in Atlanta.

She said employers may, for example, require:

  • That students can only be reimbursed if the course was completed.
  • Minimum performance standards, such as earning a particular grade.
  • Continued employment for a reasonable period after completion of the course.

She added that other permissible design options for the program include:

  • The company must approve the course before it pays for it.
  • Appeals if a company denies a course request.
  • Limits on the number of courses that can be taken in a year.

Benefits of Section 127 Programs

"It's really time to overhaul" Section 127 "to get more Americans college-educated," said Dorothy Martin, a retired HR professional in Seattle who managed corporate tuition assistance programs that benefited more than 200,000 employees at Verizon Wireless.

[SHRM members-only HR Q&A: Tax Treatment: How does The Economic Growth and Tax Relief Reconciliation Act affect educational assistance programs?]

At one point, 20 percent of the workforce at Verizon Wireless was in higher education. The average participation rate at most companies is 5 percent to 8 percent, said Martin, who became a business consultant on the design of corporate tuition assistance programs following her retirement in 2014.

With the tuition assistance program, the company reduced turnover by 50 percent, she noted. "The cost savings to the business paid for the cost of the tuition assistance program," she said.

In addition, she said there were "so many heartwarming stories" with employees telling her they never thought they would earn a college degree and were the first one in their family to get a college degree.

The program's benefits are not just about statistics but "life-changing opportunity," she said.

Reimbursing Above $5,250

The vast majority of companies providing tuition assistance cap it at $5,250 or less, but Verizon designed its program to be reimbursable up to $8,000, she said.

"One misconception is that all tuition assistance over $5,250 is taxable—that is not necessarily so," Martin noted. "If courses are job-related, are not a minimum requirement for the employee's current job and the program of study when completed will not qualify the employee for a new job or career, amounts more than $5,250 are considered nontaxable."

However, she added that "those companies that do offer more than $5,250 in tuition assistance are required to compute and administer the taxation for their employees—a cumbersome and time-consuming activity."

Employers that reimburse above $5,250 should educate participating employees about those amounts above $5,250 that are taxable. The average tuition tax percentage is 30 percent, which is high. For example, a taxable course that costs $1,000 would result in a $300 tax deduction if the $5,250 cap has already been exceeded.

"Consider the fact that the $5,250 tax-exempt threshold is often met later in the year, just when employees are counting on a full paycheck to cover holiday expenses," Martin said. "They are often caught off guard and are extremely upset when their paychecks are reduced by the tuition tax."

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