Can the church pay student loans tax-free?
The Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) provides a way for churches to provide both tuition, books, supplies, and student loan payments tax-free through January 1, 2026.
The Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) of IRC Section 127 allows churches to reimburse up to $5,250 per employee, per year, for educational expenses and/or student loans payments. These reimbursements will be excluded from wages and not be taxable to the employee who received the reimbursement tax-free through January 1, 2026.
The main requirements under Section 127 are:
- The terms of the reimbursement arrangement must be in a written document. Generally, these are part of a separate plan document. These plans are supposed to be open to all employees or at the very least an entire class of employees.
- The church cannot provide the benefit to dependents or spouses of employees.
- The church cannot discriminate in favor of highly compensated employees.
- Employees eligible for the plan must have reasonable notice of such eligibility.
Federal and private student loans qualify for tax-free contributions under a section 127 Student Loan Repayment plan so long as the loan was taken out for the employee’s own college tuition and related expenses. These loan types include:
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- Direct Subsidized, Unsubsidized, Consolidation, and Grad Plus loans
- Stafford Subsidized, Unsubsidized, Consolidation, and Plus loans
- Perkins Loans
- Private Student Loans
What types of loans do not qualify?
The following types of loans do not qualify for participation in taxable or tax-free student loan repayment plans:
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- Co-signed loans, or any other loan where the employee is not the primary borrower on the loan
- Any non-student loan such as a personal loan, home equity loan, credit card, or other revolving debt facilities
- Defaulted loans that have been turned over to a collection agency
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com