To help employees improve their skills and gain additional knowledge, many businesses provide education fringe benefits. Employees can receive up to $5,250 from their employer for educational assistance each year on a tax-free basis under a “qualified educational assistance program”.
For these purposes, “education” is defined as any form of instruction or training that develops or improves an individual’s capabilities, and it doesn’t matter if the training is job-related or part of a degree program. Employer-provided education assistance for graduate-level courses is also included, including courses normally taken as part of a program leading to a business, law, medical, or other advanced professional or academic degree.
Requirements for assistance
Any educational assistance you offer must be provided under a separate written plan and this plan must be publicized to your employees. It also must meet a number of conditions, including nondiscrimination requirements—which means that you can’t discriminate in favor of highly compensated employees. Additionally, no more than 5% of the amount the employer pays or incurs for educational assistance each year may be provided to individuals who own 5% or more of the business (including spouses and dependents).
Amounts excluded from the employee’s income as education assistance benefits cannot be claimed for a deduction or credit by the employee.
Exemptions for job-related education
If more than $5,250 is provided to an employee for educational benefits during the year, the employee generally must pay tax on the amount over $5,250. This amount should be included in income in the employee’s wages.
However, if the educational assistance is job-related, an employer can satisfy an employee’s educational expenses on a nontaxable basis—in addition to, or instead of applying, the $5,250 exclusion. For the educational assistance to qualify as job-related, it must either comply with certain express employer-imposed conditions for continued employment or maintain or improve skills required for the then-current job of the employee.
There is no dollar limit on “job-related” employer educational assistance—however, the education can’t qualify the employee to meet the minimum educational requirements to qualify for their employment or other trade or business.
Job-related educational assistance that meets the rules above can be excluded as a working condition fringe benefit and does not need to be included in an employee’s income.
Student loan repayment assistance
In order to recruit and retain employees, some employers offer student loan repayment assistance in addition to education assistance. Your employees may also be eligible for tax-free benefits due to recent COVID-19 relief laws. To learn more about student loan repayment plans or setting up an education assistance at your business, contact us today.