By Frank Mayer
Many human resources professionals are struggling to fill open positions these days. At the same time, the tuition cost for individuals who are pursuing undergraduate or graduate degrees is daunting. One solution that may be a “win-win” for employers and employees is an educational assistance plan.
An educational assistance plan involves the employer agreeing to pay on behalf of, or reimburse, the employee for tuition costs when the employee is taking certain qualifying courses. If structured properly, employer-paid educational expenses may be excluded from the gross income of an employee if provided to the employee under an Internal Revenue Code, Section 127 educational assistance plan, commonly referred to as a “127 Plan,” or if the expenses qualify as a working condition fringe benefit to the employee, under Code Section 132.
This type of educational assistance is a much greater benefit to the employee, and a better retention tool, if the employee doesn’t have to pay income tax on the amount of assistance they receive.
Section 127 Plan. A properly drafted 127 Plan provides an exclusion of up to $5,250 annually from an employee’s gross income for the payment by an employer of certain educational expenses incurred by or on behalf of an employee. The amount excluded from the employee’s gross income includes the cost of tuition, fees, books, supplies and certain equipment.
While the excludable coursework does not need to be job related, no exclusion is available for education involving sports, games or hobbies (unless the education involves the business of the employer or is required as part of a degree program). In addition, no exclusion is available for the cost of meals, lodging and transportation or any payment for the cost of tools or supplies that may be retained by the employee after completion of a course. A qualifying 127 Plan must be a separate written plan and must satisfy certain employee nondiscrimination requirements.