Many employers provide their employees with tax-free education assistance through formal Education Assistance programs that meet the requirements of IRC Section 127, but depending on their needs, companies may also offer specific work-related training as a tax-free fringe benefit under IRC Section 132(d), the Working Condition Benefit. The Internal Revenue Service (IRS) provides detailed guidance for these two approaches in Publication 15-b, Employer's Tax Guide to Fringe Benefits and Publication 970, Tax Benefits for Education.
Educational Assistance Programs
An Educational assistance program is a benefit provided to employees by reason of their employment relationship. These programs show employer support for advanced education and training and encourage employees to acquire new skills. All sizes of companies offer assistance programs, the Arlen Group says. This benefit covers graduate as well as undergraduate education but requires a formal written plan that defines who qualifies and meets other requirements of the IRS. Educational Assistance programs generally cover the cost of books, equipment, fees, supplies, and tuition up to $5,250 exclusion from taxable income for a course of study that is not work related but
- has a reasonable relationship to your business, or
- is required as part of a degree program.
These expenses do not include the cost of a course or other education involving sports, games, or hobbies or the cost of lodging, meals, or transportation.
The program qualifies only if all of the following tests are met, according to the IRS:
- The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
- The program does not provide more than 5 percent of its benefits during the year for shareholders or owners. A shareholder or owner is someone who owns (on any day of the year) more than 5 percent of the stock or of the capital or profits interest of your business.
- The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
- You give reasonable notice of the program to eligible employees.
A highly compensated employee for 2010 is an employee who meets either of the following tests:
- The employee was a 5 percent owner at any time during the year or the preceding year.
- The employee received more than $110,000 in pay for the preceding year.
An educational assistance program can cover former employees if their employment is the reason for the coverage.
The IRS no longer requires that a Form 5500 be filed for Educational Assistance programs.
Working condition benefits
Companies may choose to provide educational assistance under Section 132(d), Working Condition Fringe Benefits, because no written plan is required and there is no dollar limit on expenses, or because it fits their employees' education needs. Under Section 132(d) employers can offer a tax-free working condition fringe benefit for any expense employees can deduct on their own tax returns under IRC section 162. While a business expense typically means travel, meals, and professional dues, it can also include education that maintains or improves job skills or meets requirements for the employee to remain in his or her current position.
Excludable education expense as a Working Condition Benefit must be related to the employee's current job and must help maintain or improve the knowledge of skill required for the job.
To qualify as a working condition benefit, education must meet at least one of the following tests.
- The education is required by the employer or by law for the employee to keep his or her present salary, status, or job. The required education must serve a bona fide business purpose of the employer.
- The education maintains or improves skills needed in the job.
However, even if the education meets one or both of the above tests, it is not qualifying education if it:
- Is needed to meet the minimum educational requirements of the employee's present trade or business, or
- Is part of a program of study that will qualify the employee for a new trade or business.
These education expenses must be accountable under normal reimbursement guidelines and may include transportation and lodging.
The IRS Pub 970, Tax Benefits for Education, provides examples and tests to help determine whether the education qualifies as a working condition benefit.
Both the Educational Assistance programs and Working Condition benefit require some recording keeping and will entail associated cost to employers. Employers who offer Educational Assistance programs should keep copies of the written plan that has been distributed to employees. Employers who offer the Working Condition benefit should show that the education is required for the performance of the current job.
Ongoing operational costs to employers will include internal administration of the program records, which track details such as accumulated reimbursements and totals per year.
Employees should keep documents such as tuition bills, transcripts, and course descriptions that show the subject matter of the course. They may also provide these to their employers. To claim the Working Condition benefit, employees should keep statements from their employers that the course of study is needed for their job, as well as receipts for lodging and meals.