Employee Education Benefits
Employee education may be provided as a tax free benefit as described below. If the education expenditures do not meet the requirements below, the employer provided education expense reimbursements/payments/waivers are considered wages and are subject to FICA and FUTA withholding as provided under Internal Revenue Code (IRC) section 3401 and the corresponding regulations. Employee education provided as a tax free benefit requires proper documentation. Human Resources determines eligibility for the University’s tuition reduction plan. Tax Services determines eligibility for the working condition fringe benefit employee education.
1. Tuition reduction plan
The amount of any qualified tuition reduction to employees of educational institutions is excluded from gross income under IRC section 117. In addition, the benefit can be offered to employee’s dependents. However, the tuition reduction benefit is tax free to the employee only for education below the graduate level unless the employee is a teaching or research assistant. A summary of the University’s Tuition Reduction Plan is located at the Human Resources web page.
2. Payment of employee’s educational expenses
IRC section 127 allows up to $5,250 of educational payments per year to an employee or for the benefit of an employee for tuition, fees, books, supplies etc. under an employer educational assistance program. Such assistance is excluded from the employee’s wages. The University has an IRC section 127 plan which is integrated with the Tuition Reduction plan. The University’s IRC section 127 plan provides tax free educational assistance for an employee’s graduate tuition reduction up to a $5,250 value.
3. Working condition fringe benefit
Any employer provided educational expenses that an employer pays on behalf of one of its employees are excludable from the employee’s income as a working condition fringe benefit under IRC Regulation section 1.132-1(f) to the extent that if the employee paid for the benefit, the amount paid would have been deductible under IRC section 162.
Generally, an individual’s expenses for education are deductible, even though the education may lead to a degree, if the education is undertaken for maintaining or improving skills required in his trade or business or employment, or to meet the express requirements of his employer or the requirements of applicable law or Regulations imposed as a condition for his retention of his salary status or employment.
No deduction is allowed under section 162 for expenses incurred to meet minimum job qualifications or qualify for a new trade or business.
If an employer pays the tuition and expenses for an employee enrolled in courses that are not required for the job or that are not job related, these payments must be treated as wages to the employee.