Employer-provided tuition assistance programs must meet requirements
An employer-provider educational assistance program is a separate written plan that provides educational assistance only to employees*.
The program qualifies only if all of the following tests are met:
- The program doesn’t favor highly-compensated employees**. To determine whether the program meets this test, don’t consider employees excluded from the program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
- The program doesn’t provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
- The program doesn’t allow employees* to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
- Reasonable notice of the program is given to eligible employees.
Employees can exclude up to $5,250 of educational assistance benefits received from an employer. To qualify for the exclusion, the benefits must be part of a written educational assistance program as confirmed by the employer. These excluded benefits are not included in wages in Box 1 of a Form W-2.
Qualifying assistance can include payments for:
- Fees, and
- Expenses for books, supplies, and equipment.
Payments received do not need to be for work-related courses and do not need to be part of a degree program.
Payments for the following items do not qualify and cannot be excluded from income:
1. Meals, lodging, or transportation.
2. Tools or supplies (other than textbooks) that you can keep after completing the course.
3. Courses involving sports, games, or hobbies (unless they have a reasonable relationship to your business or are required as part of a degree program).
Employees must generally pay tax on any educational assistance benefits over $5,250. These amounts should be included as wages in Box 1 of a Form W-2. However, if the payments over $5,250 qualify as a fringe benefit, the employer does not need to include them in the employee wages.
For detailed information on employer-provided tuition or educational expense assistance programs, please contact a tax professional at ShindelRock.
*The program can cover former employees if their employment is the reason for the coverage.
**A highly compensated employee for 2022 is an employee who meets either of the following tests:
1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $130,000 in pay for the preceding year.
You can choose to ignore test (2) if the employee wasn’t also in the top 20% of employees when ranked by pay for the preceding year.