By James J. DeLuca, CPA, MST
Senior Tax Manager
A better educated workforce benefits employers and employees alike, so many businesses provide education-related benefits to encourage employees to improve their skills and gain additional knowledge.
In today’s tight job market, education assistance is becoming a key recruiting tool, as well, thanks in part to the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. The CARES Act expanded the traditional “tuition assistance” tax incentive to include student loan assistance. This means businesses can get a tax break for helping their employees pay off student loans. For the workers, such a benefit can make a company a very attractive employer.
Under current tax law, an employee can receive, on a tax-free basis, up to $5,250 each year from an employer for tuition assistance under a “qualified educational assistance program,” or for student loan payment assistance. An individual employee may receive both tuition and student loan assistance, but the aggregate dollar limit is $5,250. That is generally the maximum that the employer can deduct from taxes and that the employee may receive tax free.
The tax incentive for student loan payment assistance is temporary and is set to expire at the end of 2025.
For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree.
Additional requirements
The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet several conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of highly compensated employees. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who (including their spouses or dependents) who own 5% or more of the business.
No deduction or credit can be taken by the employee for any amount excluded from the employee’s income as an education assistance benefit.
Job-related education
If you pay more than $5,250 for educational benefits for an employee during the year, the excess amount generally will be considered taxable income to the employee. Your business should include the amount in income in the employee’s wages. However, in addition to, or instead of applying, the $5,250 exclusion, an employer can satisfy an employee’s educational expenses, on a nontaxable basis, if the educational assistance is job-related. To qualify as job-related, the educational assistance must:
Maintain or improve skills required for the employee’s then-current job, or
Comply with certain express employer-imposed conditions for continued employment.
“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for qualification in their employment or other trade or business.
Educational assistance meeting the above “job-related” rules is excludable from an employee’s income as a working condition fringe benefit.
Contact us to learn more about setting up an education assistance or student loan repayment plan at your business.
