Employer-Provided Education Benefits: The Ins and Outs
posted Jun 12, 2017 by Laura H. Yalanis, CPA, MST in the Global Tax Blog
Employers, there are opportunities for you to provide educational benefits to your employees. There are several options available to provide educational assistance in the form of tuition payments or reimbursements to employees and potentially their spouses, too.
3 options for employers
Working Condition Fringe Benefit- This allows an employer to pay for an employee’s tuition or reimburse an employee for tuition paid if the course taken is directly related to the employee’s current job responsibilities.
So, when is education considered ‘directly related’?
It must meet both requirements:
- It maintains or improves skills required by the employer for the employee’s current position.
- It serves a bona fide business purpose, in other words, the education is necessary for the employee’s continued employment.
Some other things to note:
- The courses cannot qualify the employee for a new field of employment.
- The courses cannot be satisfying the standard for the minimum educational requirement for the position. For example, if an accounting clerk wants to become the company’s controller, but first must obtain a bachelor’s degree in accounting to qualify for the position, tuition paid by the company would not be exempt from income for this employee under the working condition fringe benefit allowance.
- There is no limit on the amount an employer can provide on a nontaxable basis.
- There is no need for a formal plan to be in place for this benefit.
- The employer can be selective with this benefit- it does not have to be offered to all employees.
Educational Assistance programs- An employee can exclude up to $5,250 of educational assistance paid by the employer, per calendar year, from his/her gross income.
A few requirements must be met:
- You must have a written plan document.
- You cannot provide more than 5% of total annual benefits paid out under the program each year to employees who own more than 5% of the company.
- You are not permitted to provide eligible employees with a choice between educational benefits or other taxable compensation.
- You are not permitted to give favor to highly compensated employees.
- Courses do not have to be specific to the employee’s current position. In the example above for the accounting clerk, under this program, up to $5,250 of that employee’s tuition reimbursements would be exempt from income.
Tax-exempt charitable foundation-The employer can establish a tax-exempt charitable foundation to award scholarships to employees, employees’ spouses and/or dependent children etc.
Some things of note:
- Of the three options, this one is the most costly and carries with it the most administrative burdens.
- You have to set up a separate organization (Corporation, Trust or Association) with a functioning board of directors. You have to file form 1023 to request tax exempt status.
- There are annual reporting requirements.
- There must be a formal and independent application and selection process to determine award recipients.
- IRS approval is NOT guaranteed.
If you are interested in rewarding select key employees, Option 1 would be the most fitting. If Option 1 does not work for a certain employee (i.e. he/she does not pass the qualification test), another option for your company is to give that employee a payroll bonus that is grossed up so that your company absorbs the taxes associated with that additional bonus. If options 2 or 3 are pursued, enlisting legal counsel to set up the written plan and organizational documents is highly recommended!
For further guidance, don’t hesitate to contact me or a member of our Tax Services Team.