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Educational assistance program
  • Employers can exclude up to $5,250 of educational assistance provided to an employee under an educational assistance program from the employee’s wages each year.
  • Educational assistance expenses generally include the cost of books, equipment, fees, supplies, and tuition but do not include the cost of a course or other education involving sports, games, or hobbies, unless it has a reasonable relationship to the employer’s business or is required as part of a degree program.
  • The CARES Act expanded the definition of educational assistance to allow certain employer payments of student loans paid after March 27, 2020, through January 1, 2026, unless extended by future legislation.

Qualifications

For an employer to offer a qualified educational assistance program which is nontaxable income to the employee, certain requirements must be met under Internal Revenue Code Section 127 and 26 CFR 1.127-2:

  • Must be a written plan;
  • May be for graduate or undergraduate courses;
  • Annual reimbursement maximum of $5,250;
  • Must not discriminate in favor of highly compensated employees.

The courses are not required to be job related. However, in general, courses related to sports, games, or hobbies, are only covered under Section 127 if they are reasonably related to the employer’s business or required as part of a degree program.

A company must establish a written plan to assist employees financially for approved educational courses — graduate or undergraduate, professional certifications and classes to prepare for professional certifications. Any type of course, certification, class or anything covered under such a policy must usually be pre-approved by Human Resources.

An approved course of study is typically defined as a course, degree program or professional certification that maintains or improves skills in the employee’s present job or a job to which the employee could likely/reasonably be promoted or transferred. However, it does not have to be job-related to be nontaxable. Training that is necessary to perform or improve a job (e.g., forklift training and certification or attending a seminar or conference) would fall under training, not the Educational Assistance program.

Annual reimbursement maximum

Under this policy an employee may be reimbursed a designated percentage for each approved course or professional certification, and related expenses (e.g., tuition, books, supplies, equipment necessary for class, but not tools or supplies which employee may keep after the course is completed), up to $5,250 per calendar year. Reimbursement of any amount over $5,250 is considered taxable income according to IRS regulations.

Employer requirements and restrictions may be set

An educational assistance program offered by an employer may set numerous requirements and restrictions, including:

  • The designation of approved institutions of higher learning (often defined as technical or trade schools, accredited colleges, and universities).
  • When suitable courses are not available locally, or when an employee’s work schedule limits the method of study, the company may grant approval for enrollment in certain e-learning and correspondence courses.
  • Allowing reimbursement only for the attainment of a minimum grade for a successfully completed course. Course attendance should not interfere with the employee’s regular job and must typically be taken on the employee’s own time (unless an exception is granted).
  • An expectation that individuals receiving significant reimbursements for completion of approved courses will reciprocate to the company in productivity and service longevity.
  • Any employee who voluntarily terminates employment with the company within a specific time after completing a course of study for which reimbursement was received may be required to repay a certain percentage of the money received during the preceding 12 months.

Exclusion for employer payments of student loans

Section 2206 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expands the definition of educational assistance to include certain employer payments of student loans paid after March 27, 2020. Qualified education loans are defined in chapter 11 of IRS Pub. 970. This exclusion expires January 1, 2026, unless extended by future legislation.