State:

National
Many employers offer assistance to employees who attend outside educational programs, particularly in technical areas of study. These programs should have well-defined guidelines. Common policies include:
Prior approval by supervisor. Approval by a supervisor before a course is begun can ensure that the program will have some relationship to the employee's future within the company.
Time of payment. For programs lasting a year or more, most employers make reimbursement at the end of each term rather than at the end of the entire program. Some employers arrange to have schools bill the company directly, so the employee/student does not have to pay the tuition and then wait to be reimbursed.
Verification. Requiring the employee/student to obtain verification of successful completion of the program of study, and/or to submit receipts, is a prudent policy.
Performance standards. Many employers require employees to obtain a specified grade to be entitled to reimbursement.
Unless employer-provided tuition assistance qualifies for a tax exemption under a specific provision of the Internal Revenue Code (IRC), it is considered as taxable income to the employee. Tax-free tuition assistance is much more valuable to the employee and also saves the employer its share of employment taxes. Tuition assistance qualifies for tax-free status if the aid is provided under an education-assistance program that meets the requirements of IRC Sec. 127 or if the courses taken are directly job related so that the cost is considered to be an employer business expense under IRC Sec. 162.
IRC Sec. 127 allows employers to provide up to $5,250 per year of tax-free educational assistance to an employee. This tax exclusion applies even if the courses taken are not work related.
Graduate courses. An EAP may cover the costs of graduate-level courses, including courses of the type “taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.”
Section 127 requirements. To qualify for favorable tax treatment, an employer's Section 127 program:
• Must be a separate written plan for the exclusive benefit of employees
• May not discriminate in favor of officers, owners, or highly compensated employees or their dependents
• May cover books and other expenses in addition to tuition
• May not cover the cost of tools and supplies that the employee may retain after completion of a course, or meals, lodging, or transportation expenses
• May not cover a course involving sports, games, or hobbies
• May be conditioned on successful completion or attaining a particular grade in a course
Permanent provision. Sec. 127 was a temporary provision of the tax code, but it was made a permanent provision effective in 2013.
Employees generally do not have to pay taxes on the value of work-related tuition assistance. Work-related educational assistance is deductible by the employer and tax free to the employee as an employer business expense under IRC Sec. 162. There is no dollar limit on work-related educational assistance. There is also no requirement that the program be in writing, although written guidelines are advisable.
A course only qualifies as work-related education if it maintains or improves the skills required by the business or trade or meets an employer's express requirements or requirements imposed by law to stay in a particular job. The most obvious example of work-related courses are courses taken to fulfill continuing education requirements for licenses or certificates that must be held to perform a particular job. Other courses that will usually qualify are refresher courses or courses on the latest developments in an employee's field.
Warning: To qualify as work related, a course must maintain or improve the employee's skills for the current job, not for a promotion or transfer to another job.
Tuition reimbursement programs are not covered by ERISA's reporting and disclosure requirements. In 2002, IRS also did away with the requirement to file a Form 5500. IRS made the exemption retroactive to all prior years for which the forms had not yet been filed. Thus, tuition reimbursement programs have no annual reporting requirements for past, present, or future plan years.
Related Topics:
National
Many employers offer assistance to employees who attend outside educational programs, particularly in technical areas of study. These programs should have well-defined guidelines. Common policies include:
Prior approval by supervisor. Approval by a supervisor before a course is begun can ensure that the program will have some relationship to the employee's future within the company.
Time of payment. For programs lasting a year or more, most employers make reimbursement at the end of each term rather than at the end of the entire program. Some employers arrange to have schools bill the company directly, so the employee/student does not have to pay the tuition and then wait to be reimbursed.
Verification. Requiring the employee/student to obtain verification of successful completion of the program of study, and/or to submit receipts, is a prudent policy.
Performance standards. Many employers require employees to obtain a specified grade to be entitled to reimbursement.
Unless employer-provided tuition assistance qualifies for a tax exemption under a specific provision of the Internal Revenue Code (IRC), it is considered as taxable income to the employee. Tax-free tuition assistance is much more valuable to the employee and also saves the employer its share of employment taxes. Tuition assistance qualifies for tax-free status if the aid is provided under an education-assistance program that meets the requirements of IRC Sec. 127 or if the courses taken are directly job related so that the cost is considered to be an employer business expense under IRC Sec. 162.
IRC Sec. 127 allows employers to provide up to $5,250 per year of tax-free educational assistance to an employee. This tax exclusion applies even if the courses taken are not work related.
Graduate courses. An EAP may cover the costs of graduate-level courses, including courses of the type “taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.”
Section 127 requirements. To qualify for favorable tax treatment, an employer's Section 127 program:
• Must be a separate written plan for the exclusive benefit of employees
• May not discriminate in favor of officers, owners, or highly compensated employees or their dependents
• May cover books and other expenses in addition to tuition
• May not cover the cost of tools and supplies that the employee may retain after completion of a course, or meals, lodging, or transportation expenses
• May not cover a course involving sports, games, or hobbies
• May be conditioned on successful completion or attaining a particular grade in a course
Permanent provision. Sec. 127 was a temporary provision of the tax code, but it was made a permanent provision effective in 2013.
Employees generally do not have to pay taxes on the value of work-related tuition assistance. Work-related educational assistance is deductible by the employer and tax free to the employee as an employer business expense under IRC Sec. 162. There is no dollar limit on work-related educational assistance. There is also no requirement that the program be in writing, although written guidelines are advisable.
A course only qualifies as work-related education if it maintains or improves the skills required by the business or trade or meets an employer's express requirements or requirements imposed by law to stay in a particular job. The most obvious example of work-related courses are courses taken to fulfill continuing education requirements for licenses or certificates that must be held to perform a particular job. Other courses that will usually qualify are refresher courses or courses on the latest developments in an employee's field.
Warning: To qualify as work related, a course must maintain or improve the employee's skills for the current job, not for a promotion or transfer to another job.
Tuition reimbursement programs are not covered by ERISA's reporting and disclosure requirements. In 2002, IRS also did away with the requirement to file a Form 5500. IRS made the exemption retroactive to all prior years for which the forms had not yet been filed. Thus, tuition reimbursement programs have no annual reporting requirements for past, present, or future plan years.
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