Employer-Provided Educational Assistance
The federal government offers many deductions and tax credits to help Americans finance education. One of the best of these is the employer-provided educational assistance. An employer can provide up to $5250 of educational assistance benefits each year to an employee that is not includable as compensation to the employee. The educational assistance is one of the few fringe benefits not subject to income taxes, payroll taxes or federal unemployment taxes. The educational assistance plan must be written and meet certain other requirements. However, none of the expenses paid by the employer can be used as a basis for any other deduction or credit such as the American opportunity credit or the lifetime learning credit.
To qualify for tax-free treatment, the educational assistance program must be a separately written plan provided only to employees and that also satisfies all of the following rules:
- The plan does not favor highly compensated employees, which are any employees who owned at least 5% of the employer's business at any time either during the current or the preceding year or if the employee was paid more than $115,000 in the preceding year, unless the educational assistance program was part of a collective bargaining agreement and that the educational assistance was bargained in good faith.
- More than 5% of the benefits of the program does not go to shareholders or owners who, at any time during the year, owned more than 5% of the stock, or the capital or profits interest of the employer's business.
- The employees cannot be offered any other benefit instead of the educational assistance that would be includable in income.
- Reasonable notice of the program must be given to all eligible employees.
To qualify for the tax-free treatment, the educational assistance must be used for payments for tuition, fees, books, supplies, and equipment. Equipment and supplies only qualify, however, if they are used only during the course. If it is something that the student can keep afterwards, then those expenses, except for textbooks, do not qualify.
Other expenses that do not qualify include meals, lodging, or transportation and courses on sports, games, or hobbies unless they are either required as part of a degree program or they are reasonably related to the employer's business.
Qualified expenses do not require that the courses taken be work related nor, unlike many other educational tax benefits, do the courses have to be part of a degree program. The educational assistance can also be used to finance graduate courses.
Any amounts paid over $5250 are taxable to the employee, so the employer should include that portion of the assistance as wages on Form W-2, Wage and Tax Statement. However, payments greater than $5250 may be excludable from the employee's income if it is a working condition fringe benefit, which is a benefit that would be deductible as an employee business expense if the employee had paid it.
An employee is defined, for the purposes of the educational assistance benefit, as any of the following individuals:
- a current employee
- an employee who has left because of retirement, disability, or was laid off
- a leased employee who has worked full-time for at least a year under the employer's direction or control
- a sole proprietor
- a partner employed by the partnership.