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Under the Heroes Act, Employers can Help Pay your Student Loans

On December 27, 2020, President Donald Trump signed into law a $900 billion pandemic relief bill that provides extended relief for qualified student loan borrowers. Known as the “Heroes Act,” the stimulus package is a win for borrowers seeking student loan repayment from their employers.

The initial $2.2 trillion stimulus package that Congress passed in March 2020 – the “Cares Act” –temporarily expanded Section 127 of the Internal Revenue Code (the “IRC”) to permit employers to make tax-free payments of up to $5,250 during calendar year 2020 towards employees’ qualified federal and private student loans. Prior to the Cares Act, employers were permitted under IRC Section 127 to make tax-free payments of up to $5,250 per year under an education assistance program towards an employee’s qualified educational expenses, which included, for example, tuition and books, but not student loan repayments.

The Heroes Act extends student loan assistance under IRC Section 127 for five years. Accordingly, employers may now pay employees up to $5,250 per year towards qualified educational expenses, student loan repayments (both principal and interest), or a combination of both –tax free – until December 31, 2025.

The Heroes Act further stipulates:

  • Payments must be for a qualified education loan incurred for the education of the employee (i.e., payments cannot be for the education of an employee’s spouse or children); and
  • The provisions for education-assistance programs under IRC Section 127 remain in full force. For example, employers must adopt and implement a written plan describing the tuition assistance benefit and must communicate the terms of the program to eligible employees. Additionally, no more than 5% of the amounts paid can go to shareholders and owners who own more than 5% of the company’s stock or capital.

Employers that currently provide student loan assistance with post-tax dollars, or that do not currently offer student loan assistance at all, may wish to consider taking advantage of this temporary extension as it provides a valuable, tax-advantageous benefit that will help attract, retain, and incentivize a modern workforce. Please contact Gretchen Harders or Cynthia J. Park* for assistance with implementing or adjusting current educational assistance programs.

*Law Clerk – Admission Pending