What is a Section 127 plan? - Paper Trails

What is a Section 127 plan?

In today’s economy, all business owners are struggling with hiring and employee retention. Businesses are looking for and taking advantage of any tool available to them to acquire and retain top talent. One potential tool employers can take advantage of is student loan assistance for their employees. A Section 127 plan allows employers to assist their employees with student loan payments and is a great fringe benefit to take advantage of. Let’s take a look at what a Section 127 plan is.

What is Section 127?

Section 127 of the Internal Revenue Code (IRC) covers everything to do with Educational Assistance Programs. The Coronavirus Aid, Relief and Economic Security (CARES) Act amended Section 127. The amendment expanded the definition of “tuition reimbursement” to include student loan repayment. Under Section 127, employers are allowed to provide payments to employees for student loan payments tax-free.

How much can employees receive in reimbursement under Section 127?

Each year, eligible employees can receive up to $5,250 for qualifying educational expenses. This amount is not added to the employees income. Consequently, employees do not have to pay federal or state income tax on this amount. This is one type of nontaxable expense reimbursement. Any amount reimbursed by the employer over $5,250 would be added to the employee’s income, resulting in taxes being withheld on that amount.

Additionally, any payments made to or on behalf of an employee is considered a deductible expense for the employer. The employer is not responsible for withholding necessary payroll taxes on this amount.

What is a Section 127 plan?

In order for an employer to offer this benefit to their employees, they must have a written plan document in place. A Section 127 plan is just that, a document outlining your business’ student loan assistance plan for employees. Items to consider addressing in this document include:

• Eligibility – Which employees will be able to take advantage of this benefit?
• Frequency – How often do you want to make payments?
• Dollar amount – How much do you want to contribute?
• Tenure – How long until employees are eligible for the program?
• Lifetime Limit – Do you want to set a lifetime max on how much an employee can receive?
• Tiered contributions – Do you want to increase your contribution amount based on tenure?

Are there other rules surrounding a these plans?

While businesses have flexibility on creating a plan that works for their business, there are some rules that must be followed. These rules include:

• The employer must have a written plan in place.
• The maximum annual exclusion is $5,250 per employee.
• Employees may not be offered the choice between educational assistance and other compensation (i.e. additional PTO).
• Employees must be given reasonable notification of the availability and terms of the program.
• The student loan being paid must be that of the employee, not of their child or spouse.
• The program can not discriminate in favor of highly compensated employees and those that have greater than 5% ownership can not receive more than 5% of the benefits.
• Payments can be made directly to employees as reimbursement or directly to the lender.

Feel free to contact us to learn more about Section 127 plans or to get started offering this benefit to your employees!