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*.

For Employers:

The program qualifies only if all of the following tests are met:

  1. 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.
  2. 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.
  3. 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.
  4. Reasonable notice of the program is given to eligible employees.

For 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:

  • Tuition,
  • 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.