Peter Robbins, The Daily Record Newswire
Q: We have two employees who would like to pursue their masters of business administration and another who has asked if we would help out with some additional training. As an employer we would like to help them achieve their goals, but we also don’t want to treat any assistance we give as compensation to them. Besides the taxes they would pay, it would be administratively difficult for us to track the amount to include in their wages. What is the best way to help them out?
A: There are several options you can consider in helping your employees further their education. The simplest method is to encourage further education and reward the employee through a bonus or similar remuneration. While this is easy for the employer, it has the disadvantage that the additional compensation is taxable to the employee. Based on your question, this is not the way you want to go.
Perhaps a better option is to institute an educational assistance program or Section 127 plan at your company. While these programs were set to expire at the end of 2012, the recently passed American Taxpayer Relief Act of 2012 permanently extended this valuable tax benefit.
An educational assistance program allows up to $5,250 of educational assistance paid by the employer to be excluded from the employee’s income each year, provided certain requirements are met. Amounts paid over the $5,250 cap may be excluded if they qualify as working condition fringe benefits, but as a general rule the excess must be included as part of the employee’s wages.
The program can be fairly broad-based by allowing your employees to seek their MBA or other degree, develop their skills for the work they provide to the employer, or participate in many learning opportunities that may not be directly related to work or part of a degree program. This is a great opportunity for employees to gain education without paying income tax on the benefit provided by the employer. It is also a great opportunity for the employer to encourage more education it its workforce.
The assistance provided by the employer can include payments for tuition and related fees and expenses, books, and certain supplies and equipment needed for the class.
However, certain payments are not allowed, such as payments for meals, lodging or transportation to the class, or tools that can be kept by the employee at the end of the class.
In order to qualify, the plan must be written and must not favor just highly compensated employees. In fact, no more than 5 percent of the benefits can go to owners. Also, employees cannot be given a choice of participating in the plan or getting cash or other compensation; they either use the plan or they don’t. But the employer can also restrict the plan if so desired. Allowable restrictions can include limiting the education to job-related courses, limiting when the classes can be taken (for example, only during non-business hours), or requiring completion of a certain term of employment prior to being eligible for the benefit. So, consider establishing an educational assistance program. It is a fairly low-cost benefit that can produce great rewards for both the employee and the employer.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
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Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
