Payroll in Practice: 7.8.2024

Question: What are the primary methods employers use to provide education benefits to employees?

Answer: Employers generally provide educational benefits to employees either as working condition fringe benefits or through a written educational assistance program. Qualifying educational benefits are not included in employees’ taxable income.

Some job-related education may qualify as a working condition fringe benefit. The working condition fringe benefit rules apply to property or services an employer provides so that employees can do their jobs. The amount paid by an employer for the benefit is excludible from employee income to the extent the cost of the benefit would be an allowable business expense deduction for the employee had the employee paid for it. Any amount paid or reimbursed must be substantiated by the employee under the accountable plan rules.

To qualify, education must meet one of two conditions. Either it must be required by the employer or by law for an employee to keep their present salary, status, or job and serve a bona fide business purpose of the employer, or it must serve to maintain or improve knowledge or skills needed by the employee in performing a job.

Even if the education meets one or both tests, it does not qualify as a working condition fringe benefit if it is either a minimum educational requirement for the employee’s present trade or business or part of a program of study that will qualify the employee for a new trade or business.

For example, a General Educational Development program does not qualify as a working condition fringe benefit if an employee needs it to meet the minimum education requirements for the current job.

If the education is part of a degree program, individual courses within the degree program must be evaluated separately for qualification as a working condition fringe benefit.

If the education does not qualify as a working condition fringe benefit it may be excluded from income under an educational assistance program. This is a separate written plan that does not favor highly compensated employees and does not provide more than 5% of its annual benefits to shareholders, owners, or their spouses or dependents. The plan must also not allow employees to choose to receive cash or other benefits that must be included in income instead of educational assistance. An employer must give reasonable notice to eligible employees of an educational assistance program.

The program may provide benefits to former employees if their employment is the reason for the coverage. This benefit may be provided to current, retired, disabled, or laid off employees, as well as certain leased employees, sole proprietors, and partners performing services for a partnership.

Education under this program does not have to meet the business purpose or the employment-related knowledge or skills requirements. While the definition of covered education has changed several times, it currently includes graduate-level courses.

Up to $5,250 of education assistance may be excluded from an employee’s wages each year. Any assistance over $5,250 is included in wages. If the employer does not have a plan, then any assistance provided is included in wages unless it qualifies as a working condition fringe benefit. IRS instructions provide that working-condition fringe benefits are not included in determining when the $5,250 limit for education assistance is reached.

Employer payments that qualify for the education assistance exclusion are payments for tuition, books, equipment, fees, and supplies required for the education. The cost of a course or other education involving sports, games, or hobbies does not qualify unless the education is reasonably related to the employer’s business or is required as part of a degree program.

Payments for tools and supplies, other than textbooks, that the employee is allowed to keep after the course ends do not qualify for the exclusion. Payments to cover meals, lodging, or transportation also do not qualify. The employee must be able to substantiate that the educational assistance provided was used for qualifying education expenses.

As part of the Covid-19 pandemic relief, Congress temporarily expanded the definition of education assistance to include employer payments of principal or interest on any qualified education loan incurred by an employee for the employee’s education. The payments may be made to the employee or directly to a lender through 2025. This did not change the $5,250 maximum amount that may be excluded from wages during the year.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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