Are Your Clients Overlooking the Tax-Free EAP Student Loan Repayment Assistance Option?

by Prof. Robert Bloink and Prof. William H. Byrnes

Student loan repayment assistance has become a hot topic in recent employment benefits discussions.  Under the SECURE Act 2.0, employers are now entitled to make matching contributions to an employer-sponsored retirement plan based on an employee’s qualified student loan payments.  Still, the option is extremely new—and many employers have declined to offer the benefit as of yet due to concerns about getting the program right.  Employers who are hesitant about offering the new student loan matching benefit may be interested in an option that’s been available for some time—the educational assistance program (EAP).  While EAPs have historically been used to offer tax-preferred assistance for tuition costs, employers are currently able to offer student loan repayment assistance via the EAP structure (for a limited time only).  The rules governing EAPs are complex, but these programs can offer a powerful benefit option when implemented properly.

EAPs: The Basics

EAPs are governed by IRC Section 127.  Historically, EAPs could only be used to help employees cover their current education expenses, such as tuition or books.  Effective as of March 27, 2020, EAPs can also be used to help employees repay principal and interest on their existing qualified student loans.

Student loans that qualify are generally those that also qualify for federal tax deduction purposes.  That means the loan must have been incurred while the employee was enrolled at least half-time in the educational program and working toward a degree, certificate or recognized credential at an accredited educational institution.

Employers can opt to reimburse the employee for student loan payments they have made, or they can elect to pay the student loan servicing company directly.  Employers who choose to reimburse the employee should take caution and implement substantiation procedures to ensure the employee has actually made the student loan payments.

In the aggregate, employers are only permitted to provide each employee with up to $5,250 in tax-preferred education-related benefits.  The payments are not treated as taxable income to the employee.  Amounts that exceed the annual limit are, however, taxable to the employee.

As with most other tax-preferred programs EAPs must be in writing and employees must receive a Summary Plan Description.  For existing EAPs, the written document must be amended so that it provides for student loan assistance (unless the document is written to permit any available assistance under Section 127).

Nondiscrimination requirements also apply to EAPs.  If the employer does not offer the same benefit to all employees, it must show that the program does not discriminate in favor of highly compensated employees.  Employers aren’t required to offer the same benefit to all employees and, in fact, can offer the benefit to only a group of employees (for example, full-time employees, but not part-time employees) as long as the benefit remains non-discriminatory.  Further, no more than 5% of the EAP benefits can be paid to more-than-5% owners, their spouses or dependents each year.  Violating the nondiscrimination rules has serious consequences and will result in loss of preferred tax treatment for all benefits paid under the EAP.

Post-SECURE 2.0 Student Loan Match

The student loan matching provision also provides a powerful student loan repayment benefit, albeit a less direct one.

Typically, employers make matching contributions to employer-sponsored retirement plans based on the participant’s elective deferrals to the plan.  For example, an employer may offer a 50 percent matching contribution up to 5 percent of the employee’s salary.  So, for every dollar the employee contributions, the employer contributes an additional 50 cents—up to the compensation limit.  Historically, employees have only received this benefit if they have the funds to contribute to the account.

Post-SECURE 2.0, employers can make the matching contributions based on employees’ repayment of qualifying student loans.

Conclusion

As of yet, Congress has not acted to extend the EAP student loan repayment assistance benefit beyond the 2025 tax year.  Employers may wish to act quickly to offer this powerful benefit while it remains available—and pay close attention for changes later this year.