Strategy: Set up an education assistance plan. A new IRS ruling (IRS LR 200624059) spells out how to secure tax benefits for this type of arrangement.
In short, the first $5,250 of expenses you pay on behalf of each participating employee is tax-free. It doesn’t matter whether you reimburse employees for their expenses or pay the fees directly to the school.
Best of all, you can deduct the reimbursements or payments as business expenses.
Facts of the new ruling: A nonprofit organization established an education assistance plan for employees covered by a collective-bargaining unit. The plan provides up to $15,000 a year per employee to put toward tuition, fees and books required to complete courses at an education institution.
All bargaining unit employees are eligible to participate if they are credited with at least one year of service. To be reimbursed, the employee must complete the course and earn a “C” or better.
Tax law test: The plan must meet these requirements for the tax exclusion:
• You must create the plan in writing, and it must be devoted exclusively to education assistance (i.e., the plan can’t offer a choice between education and other remuneration).
• The plan cannot discriminate.
• No more than 5 percent of the benefits can go to highly paid employees, officers and shareholder/employees.
• A reasonable notification of both the availability and terms of the program must be provided to employees.
Note: Imposing reasonable conditions— such as successfully completing a course, remaining in employment after the course’s completion or attaining a specific grade—is not considered discriminatory.
The IRS says in its ruling that the organization passed the tax test. But only the first $5,250 of qualified expenses is covered. Thus, employees will be taxed on any benefits provided above that limit.
The tax exclusion for education assistance plans is available for tuition, books, fees and supplies, but not room and board. It’s not necessary for the courses to be job-related if they’re required as part of a degree program, but the exclusion does not apply to courses involving sports, games or hobbies.
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