Employer Student Loan Repayment - CARES Act

In your scenario, it is not a tax-free payment and the employer is not using the CARES provision correctly, it is simply a taxable bonus that is included on your W-2 and you pay tax on.  In that case, since you paid your loans with after-tax money, you can use the student loan interest deduction.  But that scenario does not use the LRAP provisions of the CARES act.

There are two typical ways that an LRAP can be applied, as far as I can see.

For employees in certain public service jobs, the employer provides a loan to the employee that is used to pay the student loan payments.  If the employee meets the employment conditions, the loan is forgiven by the employer and the forgiven loan is not counted as taxable income (as forgiven loans usually are). 

For employees not in qualified public service jobs, the employer makes a payment directly to the lender.  The value of those payments is added to the employee's W-2 as taxable income, and since it is taxable, the employee can use the student loan interest deduction.

The CARES act makes employer loan assistance paid from March 27 through December 31, 2020, a tax-free employee benefit up to $5250 (combined maximum for tuition assistance and loan assistance). The payment does not have to be directly to the lender, but the employer does have to follow all the normal rules for educational assistance plans (such as, they must have a written plan, must notify all eligible employees of the existence of the benefit, and must offer the fringe benefit to all eligible employees).  

Assuming your employer has, or creates, an educational assistance plan that covers employee tuition and/or student loan payments, that is fair and complies with all the rules and regulations for employee educational assistance plans, then any payments made to you for the payment of your loans would not be included in your W-2 taxable wages and would not be counted toward social security or retirement match.  Then, you can't deduct any part of your student loan interest that was paid with tax-free assistance.  (For example, if you paid $500 per month in student loan payments ($6000 per year), and $5250 was tax-free assistance, then you could only deduct 12.5% of your interest for the year.)

If your employer does not already have an educational assistance program, they may want to work with a fringe benefit specialist or consultant to set up a program that conforms to the proper rules and regulations, so you and the employer don't get hit with unexpected penalties. 

This is for anyone that took an extension on their 2020 taxes while struggling to figure out what to do with the Section 127 Exemption. After waiting for over an hour and a half and on a call with the IRS agent for almost two hours, this is what I was advised if you are self-employed. This note does not address Section 127 exemptions for any business entity. First, look at Pub 15-b. The Pub 15-b for 2021 (https://www.irs.gov/publications/p15b#en_US_2021_publink[phone number removed]) fixes the confusion by specifically covering sole proprietors. It also covers some partners, so check out the publication. 

First you have to adhere to the requirements, i.e. meet the definition, write out an educational assistance plan, etc. Second, Section 127 is an exemption, i.e. the specified amount of wages are not taxed and thus not counted on your taxes as income. It is NOT a deduction. You do not write off the $5,200 loan payment as an educational or business expense. Instead, you deduct the amount of student loans paid, up to $5,200 to the extent you still have income.  This can be tricky with issued 1099s which will reflect a different amount. Thus, I was advised to document the deduction. I'd say it's a good idea to document the payments as coming from the business account, whether to the lender directly each month or to yourself for payment if you have a separate business account and transfer funds into a personal account. The last part is just my personal thoughts to demonstrate transparency should an issue arise. If you qualify and take the student interest deduction, you can only deduct the principal under Section 127. 

If you have a business where you are paying educational assistance to employees, as a sole proprietor, you would deduct those funds as expenses under the employee benefit item on the Schedule C - I looked it up and believe it's line 14. 

As I said above, this is for self-employment and sole proprietors only. I am not a tax professional and I cannot state that the advice I was provided by the IRS in accurate or complete or that I accurately understood and communicated what was explained to me. Take the above information at your own risk. I am merely passing along the information it took me months to obtain. Good luck!

Hello,

I work in a Public Entity which is a Housing Authority in WA. Can my employer qualify to assist pay some of my students loan as part of benefits?

Thank you,

Cherie