Can an employer provide a tax-free student loan assistance program?

An employer can provide tax-free student loan payment assistance only through a formal education assistance program. If they do not have one in place, they must adopt one. Otherwise, the benefit cannot be provided on a tax-free basis.

The CARES Act added (and the CAA, 2021 extended) “eligible student loan repayments” to the list of items that can be reimbursed under an educational assistance program under Code Section 127. That list also includes, but is not limited to, tuition, fees, and similar payments, books, supplies, and equipment. That said, the student loan repayment benefit applies to payments made by the employer, whether paid to the employee or a lender, of principal or interest on any qualified higher education loan (including undergraduate and graduate school) for the education of the employee (but not of a spouse, domestic partner, or other dependent) before January 1, 2026. Student loan repayments (and other forms of education assistance covered by Section 127) are limited to $5,250 per calendar year.

As mentioned, employers interested in providing this benefit will need to adopt or amend a Section 127 plan document (to include student loan repayments as an eligible reimbursement). It cannot be offered through a cafeteria plan. An overview of some of the key requirements of an educational assistance program includes:

Written Plan – A written plan document is required to establish a qualified educational assistance program. The document should fully describe the eligibility, benefits, and rules of operation and should be formally adopted by the employer.

No Cash Opt Out – Employers must not offer a choice between educational assistance and cash/taxable benefits. In other words, no cash in lieu of benefits is permitted. As noted above, an educational assistance program cannot be included in an employer's cafeteria plan.

Notice – In order for a program to be a qualified educational assistance program, reasonable notification of the availability and terms of the program must be provided to eligible employees.

Substantiation – Employers should obtain substantiation from employees seeking payments under the program.

Eligibility – Only employees as defined by Section 127 can participate, including current employees (and those on leave), former employees who retired or were laid off, leased employees, and self-employed individuals (partners, sole proprietors, more than 2% Subchapter S shareholders, and independent contractors). Note that if the class of eligible employees is defined too narrowly, then there is a risk that the plan will fail the nondiscrimination tests, the result being that the plan would lose its qualified status (all tax benefits are lost).

Nondiscrimination – The educational assistance program cannot discriminate in favor of highly compensated employees (HCEs). For this purpose, an HCE is a person who is either:

• A more than 5% owner; or
• An employee who made more than a certain amount for the previous year (for example, an HCE in 2024 was someone who made $150,000 in 2023) and, if elected by the employer, was also in the “top-paid group” (generally the top-paid 20% of employees) for the previous year.

Employers considering adopting or amending a Section 127 student loan assistance program should consult with their tax advisor and/or legal counsel for specific advice and guidance.