Employers may provide their employees with tax-free tuition assistance, also referred to as employer-provided educational assistance. The amount of the employer tuition assistance is excluded from the employee’s income, up to an annual limit.
Employer tuition assistance is especially popular with MBA students, with 21.8 percent of MBA students receiving some employer tuition assistance in 2011-2012. This figure is down significantly, however, from 40.9 percent in 2007-2008. Employer tuition assistance in 2011-2012 totaled $10.1 billion, up from $9.0 billion in 2007-2008. The number of recipients declined to 1.8 million in 2011-2012 from 2.5 million in 2007-2008. Of the total in 2011-2012, 71 percent of the recipients and 56 percent of the dollars were received by undergraduate students, similar to the breakdown in 2007-2008. Overall, 5.6 percent of undergraduate students and 14.5 percent of graduate students in 2011-2012 received employer tuition assistance, down from 8.3 percent and 21.9 percent in 2007-2008. The average amount received in 2011-2012 was $4,368 for undergraduate students and $8,231 for graduate students.
Taxpayers can exclude up to $5,250 in employer-paid educational assistance for undergraduate and graduate courses. Educational assistance includes employer-provided courses of instruction. Employers can require completion or the receipt of a particular grade as a condition of reimbursement, but are not required to do so.
The $5,250 limitation is a combined limit for educational assistance received from all employers for the year. So, employees who switch employers mid-year are not eligible for additional educational assistance beyond the cumulative $5,250 limit.
Eligible expenses include tuition, fees, textbooks, supplies and equipment. Eligible expenses do not include transportation, lodging and meals. Courses involving sports, games and hobbies are also excluded, unless part of the degree program or related to the employer’s business.
Amounts above $5,250 may also be tax-free, if they represent a working condition fringe benefit.
Taxpayers cannot double dip. Amounts excluded from income as employer-provided educational assistance are not eligible for any other deduction or tax credit. Thus, each dollar of qualified higher education expense can be used to justify only one tax benefit annually.
The American Opportunity Tax Credit (AOTC) has a greater financial value than other education tax benefits. The main exception is when an exclusion from income reduces the employee’s adjusted gross income enough to trigger other tax benefits. Accordingly, it may be financially beneficial for families to prioritize the AOTC ahead of other education tax benefits, including the tax-free treatment of employer tuition assistance, if the family qualifies.
The requirements for employer-provided educational assistance must be specified in a written plan of the employer. This plan must not discriminate in favor of highly compensated employees. No more than 5 percent of the amounts paid or incurred by the employer may be provided to employees who are shareholders or owners who own more than 5 percent of the stock of the employer.
Students do not need to be degree-seeking to qualify for the exclusion from income, nor do they need to be enrolled on a half-time or full-time basis. The courses do not need to be provided by a college or university that is eligible for Title IV federal student aid. Students who have been convicted of a felony drug offense are eligible.
Only courses taken by the employee are eligible, not courses taken by the employee’s spouse or dependents.
Employer-paid tuition assistance is considered to be a form of student financial aid and will reduce the student’s eligibility for need-based financial aid, even if the employee isn’t reimbursed until after the end of the academic term and even if the reimbursement is contingent upon the employee receiving a minimum grade in the classes.
There is no phaseout on eligibility for employer-provided educational assistance.
The legislation authorizing the exclusion from income for employer educational assistance does not expire.
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