In May we wrote about a Connecticut Senate Bill 435 (S.B. 435) and certain proposed federal legislation which would have created incentives for Connecticut employers to help their student loan-burdened employees pay down their debt.
The 2019 legislative session adjourned in June, and at that time, S.B. 435 had been referred to the Committee on Finance, Revenue and Bonding, where it will remain until the next session (convening in February). The federal bills have not progressed meaningfully since our May 13 article, although a new and promising bill, S. 2962, styled the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act, was introduced by U.S. Senator Rand Paul on December 2. That bill, if passed into law, would allow for tax-free withdrawals from a 401(k) or IRA to repay student loans.
But in this season of giving, we wanted to write about one related Connecticut bill that did succeed in becoming law and will provide, beginning with the 2022 tax year, a limited Connecticut Corporation Tax credit to employers making student loan payments on behalf of employees. The credit is only available for payments on student loans that were issued by, or refinanced through, the Connecticut Higher Education Supplemental Loan Authority (CHESLA). It is believed that the credit may be part of a larger legislative initiative designed to address the interrelated issues of student loan debt and statewide workforce retention, as talented graduates often exit the state to pursue more lucrative opportunities elsewhere.
Signed into law on June 28, 2019, Senate Bill 72 (S.B. 72) (now Public Act No. 19-86) provides a state business tax credit of up to a total of $2,625 per employee for employers that make payments directly to CHESLA on behalf of certain employees with CHESLA loans. Here is a summary of the key aspects of the legislation:
- Effective Date. January 1, 2022 tax year.
- Eligible Employers. Corporations subject to the Connecticut Corporation or Insurance Premium Tax imposed by Chapters 207 and 208 of the Connecticut General Statutes (“Applicable Tax”). Note that the bill specifies that only “corporations” are currently eligible.
- Eligible Employees. Non-owner employees (partners, members, or family members of the owner are considered owners) of a corporation subject to the Applicable Tax that (a) earned their first bachelor’s degree in the “immediately preceding five year period”, (b) work full-time (at least 35 hours per week) at the employer, (c) are Connecticut residents and (d) have refinanced their student loans through CHESLA. Eligibility for the credit is determined for each tax year, so payments to CHESLA on behalf of an employee who graduated in 2018, for example, will be eligible for the credit in the 2022 and 2023 tax years, but not thereafter. Accordingly, the scope of the credit is limited to payments on behalf of fairly recent college graduate-employees.
- Calculation of Credit. The credit is calculated at 50% of the amount the employer pays to the principal balance of the employee’s CHESLA loan. In other words, to avail themselves of the full $2,625 credit for a given employee, the employer would need to make payments to the principal totaling $5,250 for that employee.
- Claiming the Credit. The Department of Revenue Services will provide a form for claiming the credit at some time before the credit takes effect.
The scope of credit-eligible loan repayments is limited in both amount and duration. Accordingly, we would generally anticipate that employers will offer this benefit as a lump-sum payment to CHESLA when an employee refinances his or her loans through CHESLA and notifies the employer of the refinancing within five years after their graduation year (a new hire “attract” benefit), or otherwise as part of a program that provides for a series of payments to CHESLA contingent on the employee’s continued service to the company (a “retain” benefit). We understand that CHESLA currently allows individuals other than the debtor to make payments on the debtor’s loan and anticipate that CHESLA will, prior to the credit’s taking effect, take steps to implement a robust process for accepting employer payments made in connection with the S.B. 72 tax credit.
Because payments would be made directly to CHESLA, the employee would generally have current state and federal compensation income in the amount of the employer’s payment. This is in contrast to the solution implicated by the recent IRS private letter ruling (discussed in the May 13 article), which provides a pre-tax 401(k) match benefit to the employee, tax-deferred until distribution at retirement.
We look forward to continued developments in this space. For any questions or assistance with respect to this article, please contact your Shipman & Goodwin representative or one of the authors.