Educational Assistance Programs

Companies who hire students or potential students can offer educational benefits that would be more beneficial to both employer and employee than a standard wage offer would be. This can be accomplished through the fringe benefit known as an Educational Assistance Program.

An Educational Assistance Program allows an employer to provide an employee assistance in paying for tuition, fees, books, and supplies for education. Benefits provided under this program will not be subject to income or employment taxes, and the first $5,250 will be excluded from the employee's income each year.

The requirements are as follows: (1) The program must benefit employees who qualify under rules set up by the employer but that do not favor 5%-or-more owners or employees earning more than $115,000; (2) the program may not provide more than 5% of its benefits during the year for shareholders or owners; (3) the program may not allow employees to choose to receive cash or other benefits that must be included in gross income instead of the educational assistance, (4) the employer must give reasonable notice of the program to eligible employees, and (5) the program must be in writing.

To illustrate how such a program can be better for both an employer and an employee who is indifferent about receiving wages or educational assistance as compensation, assume that an employer is contemplating offering an employee an annual raise of $5,000. Were this raise to come in the form of a salary increase, the employer would need to first deduct 6.2% for social security, 1.45% for medicare, and some amount for income tax withholding, say 5%, for a total of $632.50, leaving the employee with $4,367.50. The employer must pay out, in addition to the $5,000, an additional $382.50 for the employer portion of social security and medicare, for a total of $5,382.50.

In contrast, if the annual raise is in the form of educational assistance, neither the employee nor the employer is subject to any of the above taxes. If the employer offers a raise of $5,250.00, the total payout will be $5,250.00, a savings of $132.50. The employee will have $5,250.00 of his or her educational expenses paid for, a net benefit of $882.50 compared to receiving a salary and paying for tuition with after-tax dollars.

Certainly, an educational assistance program isn't appropriate in all cases, but it can provide savings and incentives to both the employer and employee for whom the situation is right.

Posted in: Fringe Benefits,Income Tax,Payroll Tax,Tax Incentives