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Employer Student Loan Repayment Alternate Tax Level

My employer offers a student loan repayment plan where they make yearly payments directly to the student loan servicer. It is a qualifying educational assistance program however my employer has set the tax-free limit at $3,000 instead of the IRS allowed $5,250. If for example I they make a $5,000 payment they will add $2,000 ($5,000 minus $3,000) to my taxable income and my next paycheck will reflect the additional taxes.

 

When I file my taxes this year is it possible to subtract that $2,000 from taxable income since under the IRS guidelines it would qualify as tax fee?

5 Replies
Hal_Al
Level 15

Employer Student Loan Repayment Alternate Tax Level

Q. When I file my taxes this year is it possible to subtract that $2,000 from taxable income since under the IRS guidelines it would qualify as tax fee?

A.  No. To qualify as tax free, your employer must process the payment as such, when they pay you. 

 

What is your employer's explanation for not doing the full amount (up to $5250)?

Employer Student Loan Repayment Alternate Tax Level

It’s a bit strange that the employer wouldn’t use the maximum exclusion, because if they are willing to pay $5000 toward your loan, but only treat $3000 as tax excluded, they also have to pay a little bit extra in employment taxes.

however, one of the hallmarks of this type of employee benefit plan is that it must treat all employees fairly and equally. Maybe the company has decided that some employee positions are not valuable enough to deserve the full $5000 of tax free assistance, and if they limit the assistance for some, they have to limit the assistance for everybody. 

Employer Student Loan Repayment Alternate Tax Level

This is their wording: We believe that we will save money on the plan by using the lower tax-free limit.

 

Translation: They use the lower tax-free limit to discourage people from using the plan while they can use the existence of the plan in recruitment efforts.

 

Real stand-up company. They had revenue of $600+ million last year so not a small shop.

 

Thanks for your response. I was hoping that wouldn't be the case but I guess I can keep on hounding them to change the plan.

Employer Student Loan Repayment Alternate Tax Level

"they also have to pay a little bit extra in employment taxes"

 

I'm not familiar with how this works. If they don't count it as tax-free and it goes into the earnings then they also pay some additional employment taxes? Must mean that they figured those would be less then the amount of people they will discourage from using the program.

 

"if they limit the assistance for some, they have to limit the assistance for everybody"

 

I actually see this move (especially when they admit that it is to discourage use) to benefit higher earners who are able to absorb the increased taxes thus maybe making it unfairly benefit highly compensated employees.

Employer Student Loan Repayment Alternate Tax Level


@plmetz wrote:

"they also have to pay a little bit extra in employment taxes"

 

I'm not familiar with how this works. If they don't count it as tax-free and it goes into the earnings then they also pay some additional employment taxes? Must mean that they figured those would be less then the amount of people they will discourage from using the program.

 

"if they limit the assistance for some, they have to limit the assistance for everybody"

 

I actually see this move (especially when they admit that it is to discourage use) to benefit higher earners who are able to absorb the increased taxes thus maybe making it unfairly benefit highly compensated employees.


1. The employer pays half your social security and medicare tax (6.2% and 1.45%). They may also pay state unemployment insurance on your wages.  (You pay the other half of social security and medicare).  So compared to giving $5250 of tax-free assistance, if they give you $3000 of tax-free assistance and a $2250 taxable bonus, they pay an extra $172.50 in social security and medicare tax plus maybe some additional state unemployment insurance.

 

2. Higher-paid employees always do better than lower-paid employees.  Employers are allowed to set wages and benefits based on performance, skills and experience required, contribution to the company's bottom line, or anything else they want.  But for certain employee benefits, the employer is generally not allowed to discriminate.  That means if they want to offer a 3% 401k match to some full time employees, they must offer that to all full time employees, regardless of salary level (note that this is a bit of an oversimplification but it covers the main point). The same thing applies to health insurance, and so on.  "Fair" doesn't mean some cosmic definition of fairness, but that everyone in a similar job gets the same benefit. 

 

In the case of tuition assistance, the employer must first have a tuition reimbursement plan, they can cover up to $5250 of college tuition for courses taken.  The plan can't discriminate, but it can set broad categories for coverage (such as, all full time employees with more than 1 year of service time would be allowed).  Then about 3 years ago, Congress amended the law to allow companies to also cover student loan payments, but this is optional (the employer doesn't have to offer it) and if they do offer it, it has to be written into the plan and be non-discriminatory.  

 

The company is not required to offer the maximum of $5250.  But whatever they do offer, has to be offered to everyone in a similar job classification.  They can't offer it to you (because you are an especially productive employee or because you are friends with the boss) without offering it to everyone else.

 

If the company is audited and one of their benefit plans are found to be discriminatory, the company (not the individual employees) can face big penalties and disqualification. 

 

Lastly, note that any student loan interest that you pay not with tax-free assistance is eligible for the $2500 student loan interest deduction, assuming you meet the other qualifications.  

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