Employer Assistance in Providing Employee Education

John W. Taylor (Nov, 2017)

"An investment in knowledge pays the best interest." - Benjamin Franklin

I think everyone will agree that education is very important, maybe now more than ever in our history.  A study by Georgetown University estimates that by 2020, 65% of all jobs in the economy will require post-secondary education and training beyond high school.  35% of job openings will require at least a bachelor's degree, and 30% of job openings will require at least some college or an associate's degree.

Education is not only important for people looking for jobs, but it is also equally, or even more important, for companies to retain, educate, and train quality employees within their organization.  With the increased costs, it presents financial challenges for many people to obtain post-secondary education.  There are a number of ways that employers can assist with some of the burdensome costs for obtaining post-secondary education for their employees.

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 benefit is tax-free to the employee and tax deductible to the employer.  The Company may set certain eligibility requirements for the program.  This is a formal program which requires the Company to file Form 5500 with the IRS annually to remain qualified.  Other specific requirements to have an eligible program include:

  • Must be in writing.
  • The program should benefit employees who qualify under a set of qualifications or classifications set up by the Company, and cannot be in favor of highly compensated employees. 
  • No more than 5% of the total amount of benefits paid or incurred can be provided to shareholders or owners, including spouses and dependents. 
  • You cannot offer the employees a choice between education assistance and another type of wage or benefit.
  • The program is not required to be funded.  Therefore, if the Company does not have available cash the program can be suspended until the cash flow of the Company improves.
  • Employees must be informed as to the availability and terms of the program.

In addition to, or instead of applying the $5,250 exclusion, an employer may satisfy an employee's educational expenses, on a nontaxable basis under a working condition fringe benefit, if the educational assistance is job-related. This type of program allows employers to offer tax-free benefits for any business related expenses that employees would normally be able to deduct on their personal tax return. The employee would be reimbursed for such business expenses including travel, meals, professional dues, and job related education expenses.  Reimbursement of such expense are considered a deduction for the employer.  Business expenses must be related to maintaining or improving existing jobs skills or meeting requirements for the employee to remain at their current position.  If an employee receives reimbursement for these types of expenses they cannot deduct them their personal tax return.  To qualify as job-related, the educational assistance has to: maintain or improve 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.

Another way that an employer can assist in paying for an employee's education is through Qualified Scholarships. Employers may implement a scholarship program to provide educational scholarships for employees and/or their children, as well as other dependents. If the IRS requirements are met, the cost of qualified scholarships (primarily tuition, fees, and supplies) is deductible by the employer as a business expense, treated as exempt compensation for federal income tax, federal income tax withholding, Federal Insurance Contributions Act (FICA), Federal Unemployment Act (FUTA), and not included as wages on the employee's Form W-2.  To keep the scholarship payments tax free there are a number of strict IRS requirements that the scholarship program has to meet.

Other payments can be made on behalf of the employee for education assistance, but will not be tax free to the employee.  Payment of an existing employee's student loan is considered a fringe benefit and should be included as part of the employee's taxable wages on his/her W-2 at the end of the year, similar to a bonus payment.  Similarly, payments made to 529 plans, Qualified Tuition Programs (QTPs), and Coverdell Education Savings Accounts (Coverdell ESAs).  When a payment is made to the employee, the amount will have to be grossed up to include the employee's portion of FICA tax (Social Security and Medicare).  The employees should be aware that receiving this benefit will be taxable income to them and will affect their tax returns.  The employee will not be able to deduct any student loan interest or tuition credits for which they receive employer payment/assistance.  In addition, the employee may want to consider having Federal and NYS withholding on this benefit.  The employer may choose to gross-up the payments for these withholdings as well.  An employer can also offer employees an after-tax payroll deduction for these payments as well.

Implementing any type of employee benefit program, tuition reimbursement, or assistance program requires much thought and consideration on the tax implications for both the Company and the employee.  There is also the necessity of meeting and maintaining certain rules and regulations set forth by the IRS, Department of Labor, as well as other governmental agencies.  If you would like to discuss any aforementioned topics in further detail, please feel free to contact a Dermody, Burke and Brown tax professional.  

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