What Is Educational Assistance? | Is Education Reimbursement Taxable?

What Is Educational Assistance?

Many employers offer educational assistance as a benefit to employees. Educational assistance can help you attract and keep employees. And, it can help employees learn skills and move up in your company. Offering this benefit is a win-win for everyone.

But, having an educational assistance program is only truly beneficial if you set it up correctly. You must consider tax laws plus the needs of your business and employees.

What is educational assistance? How can it benefit your business? How do you set up a program? Who is eligible for educational assistance, and is education reimbursement taxable? Find out below.

What is educational assistance?

Educational assistance is when you pay for part or all of an employee’s educational expenses.

Educational assistance benefits vary at every business. Some employers cover different types of education, some offer different amounts of assistance, and some provide financial assistance in advance or after education is complete.

You have some say in how you offer educational assistance benefits. However, the tax codes you choose to follow will also dictate what your plan looks like.

Why have an educational assistance program

According to a survey done by the International Foundation of Employee Benefit Plans, 83% of businesses offer some educational assistance.

The top reasons the employers in the survey offer education benefits are to:

  • Retain current employees
  • Maintain/increase employee satisfaction and loyalty
  • Keep employees current on evolving skill sets required for the business
  • Attract future talent
  • Maintain/increase innovation
  • Maintain/increase productivity

By providing educational assistance benefits, you can attract new employees to your business and entice them to stay. Employees pay less out of their pockets for education, and possibly reduce or eliminate the need for loans. As employees further their education, you can give them more responsibilities, promotions, and raises.

When employees gain more skills and knowledge, your business operations improve. A successful educational assistance program has the potential to benefit everyone.

Educational assistance program requirements

Learning how to set up an educational assistance program can be complicated. There are many possible laws that you might need to follow. If you want to create an educational assistance program for your business, contact a lawyer for help.

To get you started, here are the basics of some of the laws you might need to follow.

Section 127

According to Section 127 of the Internal Revenue Code, you can give an employee up to $5,250 per calendar year, and that amount is not included in the employee’s income. That means you will not include the educational assistance on the employee’s Form W-2 and the money is considered non-taxable income.

Any amount you give to an employee over $5,250 must be included on Form W-2 and is subject to taxes.

Educational assistance programs must meet certain requirements under Section 127. The plan must:

  • Have a written document.
  • Not give more than 5% of its total annual benefits to employees who own more than 5% of the company’s stock.
  • Not give eligible employees a choice between educational assistance benefits and other taxable compensation.
  • Give employees reasonable notification about the program and its terms.
  • Not favor highly-compensated employees.

Section 132

If you don’t want to follow all the requirements of Section 127, you might be able to set up educational assistance benefits under Section 132.

Under Section 132, educational assistance benefits are nontaxable if they meet the working condition fringe benefit requirements. Basically, the educational assistance is tax free if the employee uses it 100% for work, and if the employee would normally be able to deduct the expense. You can learn about working condition benefits in Publication 15-B.

You do not have to report working condition educational assistance on Form W-2. There is no limit on the amount of nontaxable educational assistance benefits under Section 132. However, an entire degree program might not be excluded from taxes. Each course must be individually evaluated under the working condition benefit.

What does educational assistance cover?

What your educational assistance program covers depends on tax laws and how you set up the benefits.

Educational assistance can cover a variety of educational programs: a high school equivalency diploma, an undergraduate or graduate degree, or professional continuing education.

Employees can use the educational benefits for many costs, including tuition, fees, books, supplies, and equipment. The exact things employees can use the money for depends on your program and the tax code.

You might choose to distribute the funds at a specific time. Here are examples of what you might do:

  • Give the money to employees in advance to pay for classes.
  • Give money to employees after they pass the classes with a certain grade.
  • Give half of the funds up front and the remainder after successful completion.

When to Distribute Educational Assistance Infographic

You can require employees to continue their employment for a specific time in exchange for the educational assistance. A worker whose employment ends earlier needs to pay back the funds.

Employees who aren’t interested in educational assistance cannot use the money for other purposes.

“What if you already have enough degrees? Or flat out aren’t interested?” said Kelly Phillips Erb. “You’re out of luck. An educational assistance program is for, well, education; you cannot opt to switch out cash or other benefits instead.”

Employees who don’t want to continue their education simply miss out on the money. It’s important to have a variety of benefits that will satisfy employees.

You might need to include educational assistance in employee wages. Let Patriot Software accurately handle your payroll. Our easy-to-use payroll software will calculate gross wages and taxes. Start your free trial today.

This is not intended as legal advice; for more information, please click here.

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