CARES Act extends EAP to include student loan repayment

The Coronavirus Aid, Relief, and Economic Security Act (CARES) passed on March 29, 2020. It provides short term relief to Americans dealing with the

 financial fallout from the Coronavirus pandemic. 

Among the provisions is a temporary expansion of education assistance programs (EAP), often referred to as section 127 or tuition reimbursement plans. These programs allow employers to make employees' student loan payments.  


The highlights of the legislative changes to EAP plans allow for:

  • Payments made to employees or their lenders for student loans made until January 1, 2021.
  • Payments for student loans or other educational expenses may be excluded from wages up to a maximum of $5,250 a year.


What is an EAP Plan?

An EAP, or section 127 plan allows for tax-free payments of qualifying educational expenses by employees to be paid by an employer and exempted from wages. Specific criteria apply: 

  • The program must not discriminate in favor of employees who are highly compensated employees (HCE). An HCE includes those with incomes exceeding $125,000 as of the year 2019.
  • No more than 5% of the amounts paid by the employer during each year can be provided to a class of individuals who are shareholders or owners that make up more than 5% of the stock or of the capital or the profits of the employer.
  • An EAP cannot be funded by providing employees a choice between educational assistance and other remuneration included in gross income.
  • The employer must provide reasonable notice of the program its terms to eligible employees.


Discrimination & Plan Design

A key provision to Section 127 is the limitations on discrimination within the plan. The plan cannot discriminate in favor of highly compensated employees. It also does not fail to meet the requirements for utilization rates, completion, or a particular course grade. 



The expansion of IRS code section 127 includes student loan repayment under an EAP plan. While positive, there are numerous challenges for employers. These changes can significantly reduce the employer costs of the offering benefit.  

Before the CARES act, an employer's student loan payments had to be included in an employee's gross wages and subject to state, federal, and FICA taxes.  

When factoring in employer and employee taxes as well as benefit cost, expenses for student loan assistance could cost as much as 2.5X the next benefit to an employee's debt. The expansion of section 127 significantly reduces the cost for both the employer and employees.

The biggest challenge for employers is determining the value of implementing a benefit that is only temporarily available. 

While many employers may want to assist their employees via student loan payments, they'll need to either create or amend their EAP plans.  

Employers that currently offer EAPs will need to amend their plan to include student loan repayment. Employers who wish to implement an EAP will need to establish a written plan.   

Another challenge is to address anti-discrimination in the plan design. An EAP does have some flexibility in design that could allow for different annual loan payments as compared to education expenses. 

For instance: an EAP could provide a $100 monthly benefit for student loan payments and an annual $3,000 benefit for tuition reimbursement. The benefits must be broadly available throughout the organization, and the total amount awarded per employee must be less than the annual $5,200 limit. Unfortunately for many employers, the utilization of student loan repayment provisions in an EAP plan may be significantly higher than traditional educational expenses. Employers will have to determine the costs of offering the additional benefit. 

Employers will not be able to use the expansion of section 127 to strategically target recruiting or retaining specific classes of employees within the organization unless all of those individuals are not HCEs.  

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Jantz Hoffman, MBA

Written by Jantz Hoffman, MBA

Mr. Hoffman is a Registered Investment Advisor and has been assisting clients with student debt since 2010. He has appeared on PBS Nightly Business Report and been cited in the NY Times as well as other publications as an expert in student loan repayment. Mr. Hoffman received a bachelor’s degree from Humboldt State University and a master’s degree in business from Colorado State University.

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