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Use education perks to improve retention, reap tax breaks

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in Small Business Tax

With the economy picking up, applicants can be choosier when shopping for a new job. That's means they'll more closely examine your benefits package when considering whether to join your team.

Strategy: Attract and retain the best employees—and assist in their training—by adding an educational assistance plan (often called a "Section 527 plan") into your benefits lineup. Knowing the rules can help you get the most bang for the buck.

Deduct first $5,250 of payments

With an educational plan, your company can either pay employees' educational expenses directly or reimburse employees for courses they've paid for. Your company can deduct up to $5,250 of educational assistance per employee per year. The employee does not recognize that amount as income. Graduate-level courses are included.

To reap all the tax breaks, your company must have a written plan in place and notify employees about it. And it can't be rigged to benefit your family. The law says your plan can't pay out more than 5 percent of its benefits to more-than-5-percent owners of the company, their spouses or dependents.

Covered expenses include tuition, fees, books, supplies, etc. An educational plan can't pay for room and board, nor can it cover any courses that involve fun and games.

Advice: Set some conditions for payment or reimbursement. For example:

• You can require employees to earn a grade of B or higher, as shown on
a transcript.

• For professional development seminars, insist upon a statement of attendance and participation.

• Require employees to remain employ-ed for one year after course completion. If they don't, they must pay back a portion (or all) of the tuition reimbursement.

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