An Employer-provided educational assistance program can provide an excellent fringe benefit to attract and retain talented employees. In addition, both the employer and the employee can both receive a tax benefit under the program.
An employee may receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.” For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities, whether or not job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.
The educational assistance must be provided under a separate written plan that is publicized to your employees and must meet a number of conditions, including nondiscrimination requirements, i.e., it can’t discriminate in favour of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who (including their spouses or dependents) own 5% or more of the business. No deduction or credit may be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
In addition to, or instead of applying, the $5,250 exclusion, an employer may satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance has to:
- Maintain or improve the skills required for the employee’s then-current job, or
- Comply with certain express employer-imposed conditions for continued employment.
‘‘Job-related’’ employer educational assistance is not subject to a dollar limit. To be job-related, the education cannot qualify the employee to meet the minimum educational requirements for qualification in his or her employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
The benefit to the employer is an income tax deduction of $5,250 that is not subject to employment taxes as typically a payment to an employee would be, such as wages.
The benefit to the employee is a tax-free income of $5,250.
Human Resource specialist Katie Magoon from the People Solution Center assists companies in implementing human resource policies and programs. She says there are many questions that should be considered in drafting the employer-provided educational assistance policy:
- What is the maximum amount per year eligible for reimbursement?
- What is the eligibility requirement? A common practice is that employees must be there for 6 months or a year prior to utilizing the benefit.
- Do the classes taken need to be approved in advance?
- Are there limitations on the type of classes that will be approved (i.e. classes must part of a degree program)?
- How long must the employee stay with the employer after the tuition reimbursement date?
- Does the employee have to pay the money back in full or is it pro-rated based on how long the employee stays following the tuition reimbursement?
Katie also mentions, “it can be difficult for companies to recover these dollars when employees leave, so they need to know it is not a guarantee. Missouri law (and many other states) do not allow employers to withdraw money owed from the final paycheck, so you are reliant on collecting a check from employees after their departure. That being said, it is typically a very low percentage of people that leave before the defined time period. There are also methods to create a policy that limits the company’s risk.”
Employer-provided educational assistance programs can be an excellent way to stand out from other employers, attract talented staff and reduce staff turnover. Your human resources advisor and your CPA can work together to ensure your policy is drafted to maximize the benefits of the policy and tailor the policy to your business.