Most employers probably know that reimbursements and direct payments of job-related education costs are excludable from workers’ wages as a working condition fringe benefit. Maybe you’ve offered such a benefit in the past and it’s worked out well for everyone.
But if you’re ready to really get serious about promoting the professional development of your employees — and doing so in a tax-efficient manner — consider establishing an educational assistance program.
Meeting IRS requirements
An educational assistance program can cover both job-related and non-job-related education. Assuming it meets eligibility requirements, such a program can allow employees to exclude from income up to $5,250 annually in education reimbursements for costs such as:
- Undergraduate or graduate-level tuition,
- Books, and
- Equipment and supplies.
The IRS, however, won’t allow reimbursement of materials that employees can keep after the courses end (except for textbooks). You can deduct up to $5,250 of educational assistance program reimbursements as an employee benefit expense. And you don’t have to withhold income tax or pay payroll taxes on these reimbursements.
To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated workers, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available to workers.
Hiring and retaining staff
Another “hidden” advantage to reimbursing education costs is attracting new hires and retaining them. The labor markets in many industries are competitive right now, so it’s important not to overlook ways to differentiate yourself from other companies looking to hire from the same pool. Moreover, keeping an engaged, well-trained staff in place enables you to avoid constantly enduring the high costs of hiring.
Also bear in mind that Millennials make up a significant portion of the labor market now. This generation has its own distinctive traits and preferences toward working — one of which is a need for ongoing challenges and education, particularly when it comes to technology.
Keeping them on board
If your organization’s employees want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By setting up an educational assistance program, you can keep your staff well trained and evolving toward the future while saving taxes. We can help you further explore setting up such a program and its tax advantages.