Company owners – are you thinking about paying for your employee’s education? There are four different routes you can choose from:
- Job-Related Education as a Working Condition Fringe Benefit
- Education Provided Under a Sec. 127 Educational-Assistance Program
- Qualified Tuition Reduction Programs of Educational Institutions
- Scholarship Programs Under Employer-Related Private Foundations
The first two are the most popular options, and we will detail those a little further below.
Working Condition Fringe Benefit
Sec. 132(a)(3) allows an employee to exclude working condition fringe benefits from gross income. Additionally, under Sec. 1.162-5, education expenses are deductible as ordinary and necessary business expenses if the education:
- Maintains or improves skills required by the individual in his employment or other trade business, or
- Meets the express requirements of the individual’s employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.
However, there are some instances where education expenses are not deductible, i.e. If the program of study will lead to the employees qualifying for a new trade or business. If the education meets the criteria of Sec. 1.162-5, the employer’s payment or reimbursement for the education expenses will not result in taxable income to the employee.
Education Provided Under a Sec. 127 Educational-Assistance Program (EAP)
Sec. 127 allows an employee to exclude up to $5,250 each year from income for amounts received pursuant to an employer-sponsored tuition/education assistance. The following are required by the employer in order to receive tax-preferred treatment:
- Written plan – a separate written plan for the exclusive benefit of employees
- Nondiscrimination – eligibility for the program does not discriminate in favor of highly compensated employees
- Employee choice – employees are not given a choice between benefits under the program or taxable compensation
- Funding – the program may or may not be funded
- Notification – reasonable notification of the availability and terms of the program must be provided to eligible employees
The disadvantage to this option compared to the fringe benefit is that a plan must be in place and it is limited to $5,250 each year. However, unlike fringe benefits, EAPs do not require the education expense to be work-related.
Before you decide on the tuition assistance program, please consult with your CPA. If you would like more information, please contact Mike Dempsey, CPA at email@example.com or 314.576.1350.