Q: We have had to do some layoffs due to COVID-19. Several of our employees have agreements with us to help out on their student loans. How will continued payments on the student loans affect their unemployment compensation during the layoff?
A: Generally, student loan payments will be included in the definition of “wages” and treated accordingly in the determination of whether an individual is eligible for IWD benefits and the amount of those benefits.
In Iowa, wages are generally defined broadly as “all remuneration for personal services, including commissions and bonuses and the cash value of all remuneration in any medium other than cash ….”
Also note that student loan payments by an employer made to or on behalf of an employee are treated as wages for federal and state income tax purposes.
Some exceptions may apply to the determination that student loan payments are considered wages:
- The payments were being made pursuant to a forgivable loan agreement that meets the stringent standards to acquire the status of a true loan.
- The payments were made after March 27, 2020, pursuant to an educational assistance program meeting the definitions of Section 127 of the Internal Revenue Code. If the payments are made through a contract it is likely they are not being made pursuant to such a program, but it’s possible to be made both via contract and pursuant to an educational assistance program.
Unless your agreement falls under one of the exceptions, IWD will include student loan payments as part of the employee’s wages when calculating the unemployment benefit the employee may receive. (The calculation of unemployment benefits was reviewed in a previous post.) The practical impact is that if you continue to make student loan payments to, or on behalf of, your laid-off employee, their eligibility for unemployment compensation and the amount of that compensation may be affected.
Given how complex the rules are in regard to forgivable loan agreements and the variety of factors which can affect this assessment we suggest you speak with your counsel on this matter. You may also want to reconsider how your student loan payment agreements are structured going forward.
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