New Tax-Efficient Assistance for Your Employees with Student Loan Debt
The Secure 2.0 Act now allows employers to include employee’s student loan payments in the employee match calculation, and these matching dollars are tax-deductible to the employer. Although this rule is temporary, matching contributions for 2024 can qualify. The two most common plans that qualify are 401K and Simple IRA plans, and employers can create new or modify existing plans to offer this benefit, although they are not required to. Employees can self-certify the amount of student loan payments if the guidelines in IRS Notice 2024-63 are met and records are retained.
The employees benefit by allowing the dollars they pay for qualifying student loans to generate an employer match. Human resource professionals cite better recruitment, a reduction of voluntary attrition, and increased worker engagement as benefits of increased employer matching.
These matching contributions can also qualify for the Small Employer Pension Plan Tax Credits. For employers with 50 or fewer employees, this can result in a 100% tax credit for the plan’s first two years for the first $1,000 matching contributions per employee. The percentages for matching contributions are reduced for the next three years. However, a total credit of $3,500 per employee over the five-year period is possible. Consistent with most credits, the credit amount must be added back to taxable income. However, a 100% tax credit is almost always more beneficial than a tax deduction.
For those employers that have (or want to start) a qualified Educational Assistance Program, The Cares Act added IRC section 127(c) (1)(B) to the code, which allows employers to reimburse or pay up to $5,250 of employee’s student loan payments per year. These payments are tax-deductible to the employer and not included in the employee’s taxable income. This expansion of an Educational Assistance Program is optional for employers and requires amending the existing plan.
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Qualified plan details can be complex. Consult with your benefits administrators (e.g., Fidelity, Vanguard, etc.) and an experienced CPA for guidance. These programs can be worthwhile, offering potential tax savings and improved employee performance. Our team is ready to help you maximize these tax benefits and support your broader strategic tax planning needs.
