Employer Tuition Assistance

"Employer Tuition Assistance" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012

Table of Contents

Enables employees to exclude from their taxable income up to $5,250 of employer-sponsored educational benefits received each year. Employer tuition assistance includes a variety of employer-sponsored programs to help employees and their dependents pay for college. In many cases the funds received from these programs will be excluded from income and hence tax-free. Employer tuition reimbursement programs are especially popular with students pursuing an MBA. You may exclude up to $5,250 from your annual income when your employer helps you pay for higher education costs. This benefit covers employer-provided tuition assistance for both undergraduate and graduate level courses. It may be called Employer Tuition Assistance or Employer educational assistance exclusion or Employer Provided Tuition.

This also means that you do not have to include the benefits on your income tax return. In a tuition assistance program, an employer pays all or part of an employee's cost to attend college or university classes. Most employers, who offer a tuition assistance program, pay the full cost of the employee's tuition, lab fees, and books.

In most cases, employers cap the amount of tuition assistance available for employees. Employers either set a limit in terms of dollars available per employee per year or they establish the number of classes they will pay for per year per employee.

Under the terms of Section 127, employees don’t have to report employer-provided tuition reimbursement as personal income, whether the assistance is for any course at the associate, undergraduate or graduate level. The provision has been on the books since 1978, and today nearly a million working Americans take advantage of it every year. The benefit is also an important recruitment and retention tool for employers.

Qualified Education Expenses

Educational assistance benefits include payments by the employer for tuition, fees, and similar expenses, books, supplies, and equipment. It does not include payments for meals, lodging, transportation, or tools or supplies (other than textbooks) that you can keep after completing the course of instruction. Qualified education expenses include employer-provided education assistance for graduate-level course.

Your employer may require you to attain a particular grade or to complete a program in order to obtain reimbursement. Your employer may also require that you remain employed for a period of time after completing the course of study. Your employer may require you to provide receipts or other substantiation of the educational expenses. Employers may provide these benefits to retired, disabled and laid-off former employees in addition to current employees.

Why offer it?

What types of employers offer it?

All types of employers offer educational assistance programs. According to a 2007 International Foundation of Employee Benefit Plans survey, 82% of public companies offer a formal educational assistance program, while 5% offer an informal program. Additionally, "74% do not require employees to pay back all or part of any money reimbursed for education if they leave employment.

What size employers offer it?

All sizes of employers offer educational assistance programs.

What are the critical underwriting or participation requirements?

Employers should establish a written policy, which is displayed in an employee handbook or other onsite location (e.g. company intranet).

If employees waive participation in an educational assistance plan, or opt to not participate, they may not receive compensation in place of the benefit.

Expenses over $5,250 are taxable to the employee and reported on the W-2 unless it can be deducted as a qualified business expense had the employee paid for the educational expenses. This is called the Working Condition Benefit under chapter 2 of the Publication 15-B, Employer's Tax Guide to Fringe Benefits. Unlike Section 127, Working Condition Fringe Benefits must be directly job related.

Limitation

If your employer pays for more than $5,250 of education benefits for you during the year, you must generally pay tax on the amount over $5,250. Neither the American Opportunity Tax Credit nor the Lifetime Learning Credit may be claimed for a student in the same tax year that the employer pays all the student's qualified tuition and related expenses.

Deductible expenses can include tuition, fees, books, supplies, and certain transportation costs, and can be claimed in combination with an education credit or the tuition and fees deduction. However, an expense that is used to calculate an education credit or claimed under the tuition and fees provision cannot be deducted as a business expense. You cannot deduct an expense paid with a tax-free education benefit, such as a scholarship or employer-provided education assistance.

Educational assistance benefits do not include payments for the following items.

Pros and cons

Pros

Cons

For Your Information (FYI):
This information’s covers a variety of important tax topics related to higher education. It is intended for your educational use and not as legal or tax advice; it does not cover every facet or the full scope of this subject. We highly recommend that you consult a professional tax advisor or attorney and encourage you to visit the Internal Revenue Service Web site, where you will find the complete text of various relevant IRS publications.

IRS Publications

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