Employer-provided tuition assistance programs must meet requirements
An employer-provided educational assistance program is a formal plan that offers educational benefits to employees*. The program qualifies under these conditions:
- It does not favor highly compensated employees**. Exclusion from the program based on a collective bargaining agreement is disregarded if educational assistance was a subject of genuine bargaining.
- It does not allocate more than 5% of benefits during the year to shareholders, owners, or their spouses or dependents. Shareholders or owners are individuals owning more than 5% of the business’s stock or capital or profits interest at any time during the year.
- It does not permit employees to opt for cash or other taxable benefits instead of educational assistance. Reasonable notice of the program is provided to eligible employees.
Employees can exclude up to $5,250 annually in educational assistance benefits provided by their employer. To qualify for the exclusion, these benefits must be part of a documented educational assistance program verified by the employer. These excluded benefits are not reported as wages in Box 1 of Form W-2.
Qualifying assistance covers tuition, fees, books, supplies, and equipment. The payments do not need to be for job-related courses or part of a degree program.
Payments for the following are ineligible and must be included in income:
- Meals, lodging, or transportation.
- Tools or supplies (except textbooks) retained after course completion.
- Courses involving sports, games, or hobbies (unless related to the business or required for a degree program).
Employees generally owe taxes on educational assistance exceeding $5,250, reported as wages in Box 1 of Form W-2. However, if these excess payments qualify as fringe benefits, employers do not need to include them in employees’ 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.