By Frank Mayer
Many human resources professionals are struggling to fill open positions these days. At the same time, the tuition cost for individuals who are pursuing undergraduate or graduate degrees is daunting. One solution that may be a “win-win” for employers and employees is an educational assistance plan.
An educational assistance plan involves the employer agreeing to pay on behalf of, or reimburse, the employee for tuition costs when the employee is taking certain qualifying courses. If structured properly, employer-paid educational expenses may be excluded from the gross income of an employee if provided to the employee under an Internal Revenue Code, Section 127 educational assistance plan, commonly referred to as a “127 Plan,” or if the expenses qualify as a working condition fringe benefit to the employee, under Code Section 132.
This type of educational assistance is a much greater benefit to the employee, and a better retention tool, if the employee doesn’t have to pay income tax on the amount of assistance they receive.
Section 127 Plan. A properly drafted 127 Plan provides an exclusion of up to $5,250 annually from an employee’s gross income for the payment by an employer of certain educational expenses incurred by or on behalf of an employee. The amount excluded from the employee’s gross income includes the cost of tuition, fees, books, supplies and certain equipment.
While the excludable coursework does not need to be job related, no exclusion is available for education involving sports, games or hobbies (unless the education involves the business of the employer or is required as part of a degree program). In addition, no exclusion is available for the cost of meals, lodging and transportation or any payment for the cost of tools or supplies that may be retained by the employee after completion of a course. A qualifying 127 Plan must be a separate written plan and must satisfy certain employee nondiscrimination requirements.
Working condition fringe
In addition to the benefits available under a 127 Plan, Code Section 132(d) allows an employer to exclude certain educational expenses from an employee’s gross income as a “working condition fringe.” A working condition fringe is any property or service provided to an employee by an employer to the extent that, if the employee had paid for the property or service, the amount paid would be allowable as a deduction under the code as an ordinary and necessary business expense. Therefore, educational expenses paid by an employer would qualify as a working condition fringe if the employee could have deducted the educational expenses personally.
Deductible educational expenses
Generally, educational expenses are deductible by an individual under the code if the education maintains or improves a skill required by the individual in his or her employment or other trade or business in which the individual is currently engaged; or meets the express requirements of an 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, educational expenses are generally not deductible if they relate to certain minimum educational requirements for qualification in the individual’s current employment, trade or business or to education or training that enables an individual to begin working in a new trade or business.
It is recommended that an employer who desires to regularly provide its employees with incentives in the form of educational assistance have a 127 Plan in place. The advantage is that at least $5,250 annually of educational assistance furnished to an employee would generally be excludible from the employee’s gross income, without the need for the employer to determine whether the requirements necessary for the assistance to qualify as a working condition fringe have been met.
If the employer does not have a 127 Plan, the coursework would have to qualify as a working condition fringe subject to the requirements and limitations under Code Section 132 in order for the employee to avoid income tax. In other words, maintaining a 127 Plan adds some certainty to the tax consequences of employer provided educational assistance, and keeps the employer from having to determine whether educational assistance provided to an employee qualifies as an excludible working condition fringe under Code Section 132.
In order to maximize the educational incentives it offers to its employees, an employer could offer several incentives for educational assistance, including both a 127 Plan and other incentives that qualify as a working condition fringe under Code section 132.
If structured properly, employer provided educational assistance offers a great way for an employer to develop and retain a properly trained workforce and to help employees pursue their education on a tax-advantaged basis.
Mayer, a member of Bond Schoeneck & King, deals with tax-related matters.