Question: What are the tax-advantaged tuition reimbursement programs that employers can offer? What are the main considerations for each?
Compliance Team Response:
There are two main forms of tax-free educational assistance programs that employers can offer:
- Qualified Educational Assistance Program (IRC §127); or
- Working Condition Fringe Educational Assistance (IRC §132(d)).
Both of these programs are summarized in some detail in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, available at: https://www.irs.gov/pub/irs-pdf/p15b.pdf
- Section 127: Qualified Educational Assistance Program
Qualified educational assistance programs are limited to $5,250 in payments per calendar year, and they must be maintained pursuant to a separate written plan document. The employer must provide reasonable notification of the availability and terms of the program to all eligible employees. It is also subject to nondiscrimination rules to ensure that the program does not discriminate in favor of highly compensated employees.
The main advantage of a qualified program is that the educational expenses do not need to be work-related.
The primary disadvantage is the $5,250 annual limit. However, the employer may provide additional educational assistance on a taxable basis.
See page 10 of the 2018 IRS Publication 15-B for more details.
- Section 132: Working Condition Fringe Educational Assistance
Working condition fringe educational assistance programs do not require a written plan document, there is no annual limit, and there are no nondiscrimination rules. Therefore, in many aspects this is the more desirable arrangement.
However, the main disadvantage is that the education expenses must be work-related. This means that the education must either:
(a) maintain or improve skills required in the employee’s trade or business, or
(b) meet the express requirements of the employer or applicable law that are a condition of maintaining the employee’s job, status, or compensation.
The other downside is that the educational expenses being reimbursed cannot be required to meet the minimum educational requirements of the employee’s current trade or business, or be part of a program that will qualify the employee for a new trade or business.
See page 23 of the 2018 IRS Publication 15-B for more details.
Not Affected by the Tax Cuts and Jobs Act
The original House bill version of the TCJA would have eliminated the Section 127 qualified educational assistance program described above in #1. However, the final version of the bill enacted into law preserves the benefit. See slide 31 of our ABD Office Hours Webinar 2017 Year in Review: Plus What Lies Ahead in 2018 for more details.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).