Want to boost your ability to attract and retain employees? At the same time, do you want to increase your employees’ skills and creativity? If so, you may consider offering educational assistance. What is educational assistance?
Read on to learn more about this employee benefit, the advantages of having one, and IRS tax rules.
What is educational assistance?
Educational assistance, or tuition reimbursement, is when you pay for part or all of an employee’s educational expenses.
Tuition reimbursement benefits vary in 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 tuition reimbursement program
Education assistance is a pretty popular employee benefit. According to SHRM, 56% of employers offer tuition assistance to employees.
So, why should you jump on the bandwagon? You may offer an educational assistance program to:
- Retain current employees
- Boost employee satisfaction and productivity
- Increase employee loyalty
- Keep employees current on evolving skill sets required for the business
- Attract future talent
- Increase innovation
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 a tuition reimbursement 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.
According to Section 127 of the Internal Revenue Code, you can exclude up to $5,250 per calendar year from an employee’s taxable 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.
Include any amount you give to an employee over $5,250 on Form W-2. It 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.
If you don’t want to follow all the requirements of Section 127, you might be able to set up education benefits under Section 132.
Under Section 132, education benefits are nontaxable if they meet the working condition fringe benefit requirements. Basically, the 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 education 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 education benefits cover?
What your 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.
And thanks to the CARES Act, educational assistance goes beyond tuition coverage. Through December 31, 2025, educational assistance also includes student loan payments. So, you can temporarily make tax-free student loan payments for your employees (up to the IRS limit).
You might choose to distribute the funds at a specific time. For example, you might give:
- The money to employees in advance to pay for classes
- Money to employees after they pass the classes with a certain grade
- Half of the funds up front and the remainder after successful completion
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 this benefit 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.
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This article has been updated from its original publication date of June 21, 2017.
This is not intended as legal advice; for more information, please click here.