Victoria H. Zerjav is a Partner and Vania Aksentijevich is an Attorney in our Stamford office.
Connecticut recently passed "An Act Establishing a Tax Credit for Employers That Make Payments on Certain Loans Issued to Employees by the Connecticut Higher Education Supplemental Loan Authority" (Act). The Act, signed on June 28, 2019, provides eligible employers with a tax credit (for corporate business tax or insurance premiums tax) of up to $2,625 per employee per year for making eligible education loan payments on a qualified employee's behalf. Eligible loans are only those issued by the Connecticut Higher Education Supplemental Loan Authority (CHESLA) to refinance student loans. Qualified employees only include those who are residents of Connecticut. The credit equals 50 percent of the amount that an employer pays toward an employee's outstanding principal balance and is applicable to the part of the income year in which the employee resides and works in the state.
In order to qualify for the credit, the employer must 1) be a corporation licensed to operate a business in Connecticut, 2) employ the qualified employee, and 3) be subject to Connecticut's insurer and healthcare center tax or corporation business tax. Qualified employers may claim the credit, for payments made on or after Jan. 1, 2022, by submitting documentation to be set forth by the state's Department of Revenue Services commissioner. In addition to the newly enacted business tax credit, Connecticut provides seven other programs relating to education loan assistance intended to incentivize borrowers to work and live in the state.
The Act mirrors efforts at the state and federal level to address high student loan debt. Although more limited in scope, the Act appears to effectuate the impact contemplated by the federal Employer Participation in Repayment Act of 2019, which was first introduced by lawmakers in February but has since stalled on the House floor. If passed, the federal bill would allow employers to contribute up to $5,250 tax-free to their employees' student loans. In the same vein, Maine currently provides an employer tax credit for payments made toward employee student debt obligations, and four other states proposed similar legislation within the past year.
The recent state and federal legislation is representative of the growing trend whereby employers are increasingly more involved in helping employees manage student debt. An example of the efforts employers are undertaking to benefit employees with heavy student debt is reflected in a 2018 private letter ruling in which the Internal Revenue Service (IRS) determined that an employer could amend its 401(k) plan to permit participating employees to elect to receive employer nonelective contributions and true-up matching contributions in exchange for making student loan repayments. (See Holland & Knight alert, " IRS May Allow Employer Contributions to 401(k) Plans for Employees Repaying Student Loans," Sept. 21, 2018.)
As a result of the Act, employers in Connecticut may avail themselves of these tax incentives starting in 2022, while simultaneously utilizing the student loan benefit as a means to attract and retain recent college graduates and millennial workers. While personal income tax credits and deductions are at the forefront of most of these legislative efforts, seemingly working to address the challenges that education-related debt poses to members of the workforce, employers who wish to assist employees with student debt should stay tuned in to this evolving legal landscape in their jurisdictions, which may result in tax benefits for the forward-looking employer, as is the case with the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.