With historically low unemployment rates, attracting and retaining top talent can be a challenge for employers. To stand out from the crowd, many companies are considering tuition assistance programs both to grow their workforce and as a benefit to attracting and retaining talented employees. While offering student loan assistance can give you a leg up on the competition in a tight job market, there are a few things to consider before jumping in.
Why school help?
Currently, more than 45 million Americans owe more than $1.7 trillion in student debt – the second largest category of debt behind mortgages. Large companies such as Starbucks, Walmart and Amazon have all made tuition assistance a key part of their employee benefits package. Young workers are particularly drawn to educational benefits, often ranking them among their key job considerations. Especially in highly competitive industries, savvy companies are leveraging the popularity of tuition assistance benefits to attract and retain top talent.
Primary Tuition Assistance Programs
The primary vehicles for tuition assistance programs are tuition financing programs, tuition repayment assistance, direct tuition assistance, and student loan repayment. Each of these programs has its own characteristics and advantages.
- Tuition Funding Programs – In tuition funding programs, employers provide scholarships, grants, or loans to students who enroll in relevant workforce training programs or schools to develop new talents. These programs are especially useful in industries with higher barriers to entry, such as coding and nursing. In the tech industry, many “coding bootcamps” have adopted this model, often offering free or reduced tuition in exchange for a student agreeing to work for a particular company. Many employers protect their investment in these programs through revenue-sharing agreements (ISAs) or restitution/reimbursement agreements with students.
- Direct tuition assistance – With Direct Tuition Assistance, employers provide education funds to eligible employees in advance or directly to the educational institution. Since these programs do not require an employee to make upfront payments, they are often more attractive than a reimbursement-based program and allow a wider group of employees to take advantage of the program.
- Tuition Reimbursement Assistance – With Tuition Reimbursement Assistance Programs, eligible employees are required to prepay tuition and then submit a claim for reimbursement. Tuition Reimbursement Assistance Programs provide an employer with more flexibility to create strong eligibility requirements for the program, such as requiring an employee to complete classes with an adequate GPA to be eligible for reimbursement.
- Student loan repayment – Student loan repayment programs help employees repay student debt already incurred. Some employers will offer a defined contribution model, while others may offer to match the amount employees pay for their student loans. Unlike other tuition assistance models, student loan repayment programs are designed to minimize the debt employees already have rather than helping employees improve their educational qualifications.
Legal Considerations for Tuition Assistance Programs
- Put it in writing. Whether through a direct employee agreement or a formal, written policy, you must formalize the terms and conditions of any tuition assistance program in writing. Oral or unwritten policies may be difficult or impossible to enforce and may expose the employer to allegations of discrimination in the administration or provision of benefits. Carefully review the eligibility requirements, the category of employees eligible for benefits, the amounts of benefits available, and the types of education programs and expenses eligible for the program.
- Look for tax caps. As part of the COVID-19 relief package of 2020, the Consolidated Appropriations Act, Congress expanded IRS Code Section 127 to allow employers to offer up to $5,250 in loan repayment benefits tax-free students until 2025. Tax code to 26 USC § 127[YA1] . You will find the regulations in force on 26 CFR 1.127-1, 26 CFR 1.127-2 and 26 CFR 1.162-5. Although broad categories of education expenses are eligible for this tax treatment – including tuition, fees and similar payments, books, supplies and equipment – the code excludes payments for tools or supplies that the employee keeps, meals, lodging and transportation. Educational courses involving sports, games or hobbies are also excluded. Remember that tuition assistance benefits that exceed $5,250 per year are considered wages, subject to federal income and payroll tax withholding. If you provide direct payments to your employee, make sure you have a method in place to ensure or certify that the employee uses the money only for eligible expenses.
- Don’t forget the Truth in Lending Act (TILA) or the Fair Debt Collection Practices Act (FDCPA). If a benefit plan provides that an employee will have to repay the benefit (for example, the employee leaves the company before a certain period of time has elapsed), you may need to consider the Truth in Lending Act and debt collection laws such as the Fair Debt Collection Practices Act.
First, the benefit could potentially be considered a “credit” and the employer could potentially be considered a “creditor” for TILA purposes. The law requires certain disclosures as part of a credit extension, which you may need to provide if you structure your benefit program this way. In addition, TILA contains additional special student loan disclosures and limitations that may apply.
Additionally, in the unfortunate event that you are required to take action to collect reimbursement from the employee, you may need to comply with the Federal FDCPA or other debt collection laws, particularly if you use a third-party debt collector.
- Revenue Sharing Agreements (ISAs) are considered “credits” under TILA. Some tuition funding programs are ISAs and require the employee to repay advanced tuition by contributing a percentage of income. Others may require the student to sign an ISA which is only triggered if the student does not take employment with the employer or leaves the employer before a certain period of time has elapsed. The Consumer Financial Protection Bureau recently concluded that ISAs meet the definition of “credit” in the Truth In Lending Act. Therefore, ISAs are subject to the disclosure requirements of TILA and other student loan limitations. Of particular note is TILA’s prohibition on prepayment penalties for student loans, which may conflict with the structure of an ISA.
- Check state law before requiring a non-compete agreement or a repayment requirement. Some employers combine tuition assistance benefits with a non-compete agreement or an obligation for the employee to repay the benefit if they do not remain employed for a certain period of time. While this structure helps ensure the employer gets the most out of tuition assistance, such agreements may violate state employment laws that prohibit certain mobility-limiting clauses. professional. Some state laws even apply to liquidated damages provisions that impose a severe economic penalty on a departing employee. State law should be consulted to ensure that these non-compete or refund requirements would be enforceable.
Tuition assistance programs can be a key part of a company’s talent recruitment and retention efforts. Each employer should assess their particular situation as to which programs will be best and be aware of the legal strings that come with them.