Self-employed person unable to take advantage of C...
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Returning Member

Self-employed person unable to take advantage of CARES Act § 127 tax-free student loan benefit?

Thank you in advance to the TurboTax community for any input on this.

 

I am self employed, and my one-member LLC provides consulting services to businesses (as a 1099 independent contractor). My reading of the CARES Act and IRC § 127 is that although I am considered an employee under Section 127, and therefore am eligible for § 127 educational assistance benefits , I am precluded from receiving any educational assistance (such as $5,250 tax-free student loan payment) under IRC § 127(b)(3), which provides:

 

"Principal Shareholders Or Owners — 

Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer."
 
Any amount paid or incurred by my LLC for educational assistance to its employee (me) would automatically violate § 127(b)(3), because 100 percent of the amounts paid or incurred would be provided to an owner (again, me) owning more than 5 percent of my LLC.
 
Am I missing something here, or do self-employed folks get hosed under § 127? This year has been rough, and a tax-free $5,250 payment towards my student loans would be huge. 
 
 
2 Replies
Level 15

Self-employed person unable to take advantage of CARES Act § 127 tax-free student loan benefit?

I believe you are correct.  The CARES act extends the tuition benefit for employees to also covering student loan payments, but the employer can't just hand out checks.  They must have a qualified tuition plan in place and follow all the usual rules (no favored employees, etc.). To the extent that other cafeteria plans are disallowed for SE and 5% shareholders, this extra benefit is also disallowed. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Returning Member

Self-employed person unable to take advantage of CARES Act § 127 tax-free student loan benefit?

Thanks.

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