It’s no secret that employee engagement has been low for the past several decades. According to Gallup’s ongoing quarterly research, employee engagement has hovered around 30 percent since the polling organization started surveying employees back in 2000. Despite steadily rising in the aftermath of the Great Recession, employee engagement peaked at 36 percent just as the COVID-19 pandemic hit, but has since receded back to the same levels as a decade ago.
Employers have invested large sums of time and resources into trying to address this issue by introducing new perks (Free food! Dog-friendly workplaces! On-site massage therapists!) but have been unable to meaningfully move the needle when it comes to creating a more engaged workforce. Unfortunately, these surveys usually find that – despite all of these fun perks – other underlying factors are usually behind our troublesome levels of employee disengagement.
Employer-sponsored benefits can help. From learning and development opportunities and stock options to 401(k) matches and unlimited PTO, these benefits have been shown to impact employee engagement positively. Still, many of these benefits have been offered for a number of years now, and engagement continues to suffer. One employee benefit that has been vastly underutilized – today, just 9 percent of employers offer it – is a student loan repayment benefit, and it may be the key to unlocking a more engaged workforce.
What is a Student Loan Repayment Benefit?
An employer-sponsored student loan repayment benefit allows companies to pay back a portion of student loans on their employees’ behalf. In response to the lockdowns in the early days of the COVID-19 pandemic, the CARES Act of March 2020 included a little-known legislative change that allows companies to contribute tax-free dollars to pay off an employee’s student loans. In December 2020, Congress extended the tax-free status of employer student loan repayments through 2025.
How Does this Benefit Work?
There are many ways that employer-supported student loan repayment programs can work, but the most tax-advantaged way is for companies to set up an educational assistance benefit program. Section 127 of the IRS tax code lays out the requirements for these programs, which include:
- The plan does not discriminate in favor of highly compensated employees.
- Principal shareholders (who own more than five percent of the company) do not receive more than five percent of the total benefit amount paid each year.
- The plan does not offer employees a choice between educational assistance and other taxable benefits or remuneration (cash or non-cash).
- Eligible employees are reasonably notified of the 127 plan.
- Tax-free payments are only used for qualified education expenses.
How Much Can Employers Contribute?
The annual tax-free maximum contribution an employer can provide is $5,250 per employee per year, but companies don’t have to give that full amount to each participating employee. Even $50 or $100 per employee per month would go a long way toward helping workers with their student loans and would still qualify as a tax-free payment. As long as a company’s student loan repayment benefit program adheres to the rules outlined in Section 127 of the tax code, the loan repayments issued each year by the company are considered both tax-free income for the employee and a tax-deductible expense for the company.
How Much Do Employees Benefit?
Tax-free employer student loan repayments provide a dual-impact benefit – not only does each tax-free contribution help pay down an employee’s loan principal, but they also help them save hundreds to thousands of dollars in additional interest payments. Let’s say you have an employee with a $10,000 outstanding loan balance on a ten-year term at a five percent interest rate. A contribution of just $50 per month could help that employee save $1,000 in interest payments and $6,000 in principal payments while also helping to pay off their loan almost four years faster. On the flip side, if you were to offer that employee an equivalent salary increase to help them pay off their loans, they could lose anywhere from 10-37 percent to income and payroll taxes, reducing the impact of the raise. It quickly becomes obvious how tax-free student loan repayments can be the most valuable benefit a company offers on a dollar-for-dollar basis.
How Does this Benefit Impact Employee Engagement?
Student loan repayment is especially popular among Gen-Z and Millennial job seekers. One recent study found that 86 percent of employees between the ages of 23-33 would commit to a company for five years if that company helped them pay back their student loans. These two generations will make up the majority of the U.S. workforce by 2025. And the current and next generation of skilled and educated employees want this benefit. Savvy, forward-looking companies should – and will – continue to take notice.
By helping to pay down student loans, employers can significantly improve their employees’ financial health, productivity, performance, and engagement. In fact, studies have shown that student loans are a significant source of financial stress – with 62 percent of adults with federal loans saying their loans have negatively impacted their mental health – at a cost to employers of an estimated $500 billion annually. As such, this is one significant benefit that companies can offer that not only impacts an employee’s financial well-being but also their emotional well-being. A stressed workforce is a disengaged workforce, no matter the source of that stress.
Ultimately, successful employee engagement involves creating an environment where employees feel valued, supported, and motivated to contribute to the organization’s success. Companies have tried introducing a wide range of different perks and benefits over the past few decades. Still, employee engagement has remained low and continues to decline since the start of the pandemic. Our nation’s student loan debt crisis – rapidly approaching $2 trillion in size and impacting 45 million Americans – has significant impacts on financial stability, mental health, and overall wellness. Taking steps to help alleviate this stressor, which has become more accessible and tax-advantaged for employers, could be the key to unlocking a more valued, supported, motivated, and engaged workforce.
