Flexible Compensation: More than Healthcare
Adding Compensation Management Services Can Help TPAs Thrive in a Challenging Market
Employer-sponsored benefits come in many different forms. Most commonly, benefit packages include health and life insurance coverage, paid time off, healthcare spending accounts, and retirement plans. However, there is another form of flexible compensation that is becoming steadily more desirable – student loan reimbursement accounts. In this up-and-coming, underserved market, third party benefits administrators have an opportunity to fill a need that is predicted to soar in the coming years.
Employer Benefits
Across the country, companies of all sizes seek to recruit and retain top talent by offering more than salary – employees want substantial benefits packages. Benefits make people feel appreciated, respected, and can greatly improve their quality of life. Here is a list of common examples of popular non-salary employer benefits:
For employers, a benefits package can make or break the deal to hire (or keep) good employees. As companies review their benefits packages, one highly desirable benefit that is gaining more and more attention is student loan repayment assistance.
The Demand for Higher Education
In each decade since 1970, the demand for a college education has increased significantly. Part of the growth in demand is due to employer preferences, needing highly skilled workers for an advanced technological/computer age which has impacted every industry from retail to finance and education to aerospace.
The need to invest in one’s education to enhance career and earnings prospects, and the desire to expand knowledge and comprehension, has put a premium on the cost of education. To meet the greater demand, universities and colleges have had to hire more administrators and faculty, and provide more classroom and housing accommodations, among other cost increases.
Higher Demand and Higher Costs
From 2008-2018, tuition rates at public colleges and universities have increased by an average of 37 percent. In some states, tuition costs have doubled over that same time period (Louisiana 106.9%; Arizona 92.4%)2. Part of this is due to demand, but rising costs can also be attributed to cutbacks in state funding for higher education.
The cost of college tuition is putting higher education out of reach for many and it has a detrimental effect on the economy. With such a large debt burden, people must prioritize how they will spend their money. It affects their ability to buy a home or a car3, or pay for health insurance. In short, college tuition debt has become a crisis.
Student Loan Debt Crisis – A Peek at the Statistics
How bad is it? Let’s take a look at some numbers4.
How Much?
Student loan debt is the SECOND HIGHEST DEBT CATEGORY behind only mortgage debt.
Debt by Age
There are 23.2 million student loan borrowers under the age of 34, representing more than half of all student loan borrowers. Based on the federal student loan portfolio, the largest concentration of borrowers are between 25-34 years old (15.0 million), followed by the 35-49 age group (14.1 million).
Public vs Private Schools
Where is the debt?
Student loan debt is not particular to any specific region. there are 10 states that account for more than half of all borrowers.
The student loan debt crisis is ubiquitous, affecting both private and public school students in every region and every age group. With such a widespread impact, employers and third party administrators can step in to help.
History of Student Loan Repayment Assistance (SLRA) Benefits
Historically, there has been no way for an employer to provide an SLRA on a nontaxable basis to the employee. As a result, despite the well-documented negative impact of escalating student loan debt, SLRAs have remained a relatively unattractive and underutilized benefit.
However, in 2018, the Internal Revenue Service (IRS) made a change. The agency issued a private letter ruling allowing employers to match student loan repayments with contributions to the employer’s retirement plan. Such a program helps employees struggling to adequately save for retirement while paying down student debt; however, it does not provide direct assistance to pay student loans.
More recently, with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, employers are allowed to assist employees with repayment of their student loans until the end of 2020 through direct, nontaxable payments to employees or their lenders. Though temporary, the CARES Act could provide a model for future legislation designed to help curb the economic drag of student loan debt.
CARES Act
To help keep the economy afloat during the COVID-19 crisis, Congress passed the CARES Act. While most of the focus has been on stimulus payments and expanded healthcare changes, it also includes guidance to allow for tax-free student loan reimbursements made by employers and additional types of repayments that can be made. If successful, the bill could pave the way for future legislative compromises in Washington, D.C.
Under the CARES Act, employers can make nontaxable SLRA payments of up to a maximum of $5,250 per employee between March 27, 2020 and December 31, 2020. Payments must be made under an educational assistance program that meets the requirements of IRS Code Section 127. Section 127 qualifying programs allow employers and employees to avoid federal payroll taxes on qualifying payments; employees also save on federal income taxes that would otherwise apply.
Another key element of the bill is what types of payments can be made. Historically, SLRA benefits have been limited to reimbursing employees for expenses, paying expenses on their behalf, or waiving expenses (if the employer is an educational institution) charged for education while employed. The CARES Act also allows payments for principal or interest on a “qualified education loan,” under Code Section 221(d)(1), incurred for the employee’s education.
Important Features of a Tax-Free SLRA Plan
- Written Plan Document – The program must be stated in writing and explain the eligibility, benefits, and rules of operation, and be formally adopted by the employer.
- Notice – Employers must provide eligible employees with reasonable notification of program availability and terms.
- Eligibility – All employees may be eligible to participate in the program, except for certain owners. Employers may limit eligibility in specific ways (e.g., by job title or job location), but any eligibility restrictions must not discriminate in favor of highly compensated employees (HCEs). To avoid discrimination issues, the program can make all employees eligible or exclude all HCEs.
- Substantiation – Employees who receive benefits under the program should be required to validate their expenses.
- No Cash in Lieu of Benefits – An employer’s program can’t provide or offer employees a choice between educational assistance or wages.
- Claw-Back Provision – An employee who participates in the program and does not satisfy some required condition, such as remaining employed for one year, can be required to repay the benefits. (Such a provision may be hard to enforce, and some state laws may prohibit.)
The Effect of SLRA Benefits
Offering a student loan repayment assistance program plan as part of an employer’s benefit package can be an exceptional recruiting and retention tool. SLRAs have traditionally been more common in STEM and Healthcare occupations, but employers could adopt their own program to meet its needs, particularly where there is more competition (or retention needed) for talented employees.
With an SLRA, the employer makes monthly student loan payments to the employee’s lender, helping the employee to repay their student loans quicker.
Common Characteristics of Student Loan Repayment Assistance Programs
- A typical employer SLRA often involves monthly student loan payments of $100 a month with a cumulative limit of $10,000. Some employer SLRAs do not have a specific cumulative limit, continuing until the student loan debt is paid in full.
- Most employer SLRAs are limited to student loans for which the employee is directly responsible, not parent loans. Some are limited to federal student loans, while most will repay both federal and private student loans.
- The SLRA is usually limited to full-time employees and is only provided for as long as the person continues to work for the employer.
Financial Impact of Student Loan Repayment Assistance6
Consider a borrower with $30,000 in student loan debt with a 5 percent interest rate and a 10-year level repayment term.
There is significant difference in the numbers in this example, even though the monthly out-of-pocket costs are nearly even. For one, there are 34 fewer payments with the SLRA. Plus, there is 24 percent reduction in total costs, even with taxes added in and a lower interest deduction. (With a tax-free SLRA, the borrower would save an additional $2,040.00 on their taxes, reducing the net payments to $25,843.87 and increasing the total savings to $10,375.67.)
TPA Opportunity
According to the 2019 Employee Benefits Survey conducted by the Society for Human Resource Management (SHRM), Student Loan Repayment Assistance is gaining traction. In 2019, 8 percent of employers provided student loan repayment assistance in 2019, up from 4 percent in 2018 and 3 percent in 2015. By 2021, SHRM expects a third (32 percent) of all U.S. employers to offer some form of student loan repayment assistance program.
For perspective in market growth potential, look at how many people have access to Flexible Spending Accounts (FSAs). In 2019, 41 percent of private industry workers had access to a healthcare FSA, and 42 percent had access to a dependent care FSA7.
With projections of a quadruple increase for SLRAs over the next couple of years, there is plenty of opportunity for TPAs across the country. The expertise of TPAs in administering account-based benefits makes their services highly desirable – with or without the benefit being tax-advantaged. Should Congress pass future legislation to allow for further tax-free employer repayment programs, like the one under the CARES Act, most employers and employees would need assistance to make sure the plan and benefits remain compliant.
How could an SLRA plan be set up?
Depending on the solutions provider, a TPA could set up an SLRA similar to a Health Reimbursement Arrangement (HRA) benefit. The employer defines the annual amount and eligible expenses (in this case, student loans). Once the employee submits the receipt – pre or post payment – the administrator would be responsible for disbursing the funds, either by direct payment to the lender or back to the employee. The TPA would also be accountable for sending and receiving communications.
On the surface, the task may seem easy, but it could cause a considerable headache for an employer to administer the program on its own. TPA expertise in setting up plans and administering tax-advantaged and other account-based benefits can prove to be a boon for third party administrators looking to increase revenue streams through an expansion in their service offerings.
Conclusion
Mounting student loan debt is becoming a national crisis, already affecting 45 million people in the United States. It affects every region, every higher education system, and every age group. Higher demand, institutional overhead, and cuts to state funding are all contributing factors to the rapid increase in college tuition rates and corresponding rise in student loan debt. While the CARES Act currently allows tax-free repayments under an SLRA through the end of 2020, employers should look at the long term positive effect of what offering an SLRA can do, such as increasing financial wellness and providing additional peace of mind for their employees. Happier, more satisfied employees can result in longer lasting employment relationships and less turnover – putting a dent in human capital challenges and costs.
Third party administrators should look now and into the future at SLRAs as another way to expand their services portfolio and find an additional revenue stream. Building plans for employers and providing expert guidance is invaluable, as most employers do not have the time or personnel resources to handle such a program on their own. With projections of a fourfold increase in employers offering an SLRA benefit over the next few years, opportunity is wide open for those who want to accept it.
Sources
- “Educational Attainment Distribution in the United States from 1960 to 2019,” Statista.com
- “The Cost of College Increased By More Than 25% in the Last 10 Years – Here’s Why,” CNBC.com
- “The Far Reaching Impact of the Student Debt Crisis,” ScholarshipAmerica.org
- ”Student Loan Debt Statistics in 2020: A Record $1.6 Trillion,” Forbes.com
- “How to Provide Employees Up to $5,250 in Nontaxable Student Loan Repayment Assistance This Year,” Bradley.com
- “Student Loan Repayment Assistance Programs,” SavingForCollege.com
- “Flexible Benefits in the Workplace,” U.S. Bureau of Labor Statistics
About the Company:
Founded in 1984, DataPath, Inc. is an administrative solutions provider for tax-advantaged healthcare benefit plans including FSAs, HRAs, HSAs, COBRA and other employer-sponsored benefits. The company also created the award-winning employee education and engagement program, The Adventures of Captain ContributorTM. Learn more at dpath.com or call (800) 633-3841.