When it comes to paying for education, we tend to focus on the usual suspects: student loans; scholarships, grants and fellowships; and savings accounts. There are, however, a surprising number of options available, including educational assistance programs offered by employers.
To help defray the cost of education – and perhaps make you a more valuable employee – some employers offer to pay some costs of getting a degree, or simply taking credits, using an educational assistance program. Educational assistance programs are the equivalent of free money offered by employers and are considered fringe benefits to employees. Fringe benefits are usually taxable to employees and must be included in pay – unless they’re specifically excluded by law. Fortunately for taxpayers, educational assistance benefits are excluded so long as they meet certain qualifications.
Educational assistance plans must be written and all eligible employees must have reasonable notice of the plan. Like most benefits plans, an educational assistance plan cannot be discriminatory: the criteria you spell out in the plan must not favor highly compensated employees. Additionally, the plan cannot provide more than 5% of its benefits during the year for shareholders or owners.
What if you already have enough degrees? Or flat out aren’t interested? You’re out of luck. An educational assistance program is for, well, education; you cannot opt to switch out cash or other benefits instead.
Here’s how it works on your end: you can exclude up to $5,250 of educational assistance you receive as part of educational assistance from your employer. Technically, your employer excludes it by not reporting it on your federal form W-2. So, that’s $5,250 worth of educational benefits – free – and not taxable. Pretty great, right? Those benefits include tuition and fees, books, supplies, and equipment. The courses don’t have to be part of a degree program but cannot cover those for sports, games or hobbies unless they’re related to business or part of a degree program (so that archery class that I took in college would have counted, whew!). It doesn’t include meals or transportation, or tools or supplies (other than textbooks) that you can keep after the course is over.
If your employer-provided educational assistance is more than $5,250 (lucky you), your employer must include the excess amounts as wages on your federal form W-2, and you must report those amounts on your tax return unless the benefits are working condition benefits. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense (think continuing education credits, for example). If that’s the case, that amount is also excludable.
But don’t be greedy: you can’t use expenses paid for by your employer for educational assistance to claim the tuition and fees deduction, or any other deduction credit, including the American Opportunity credit and lifetime learning credit.
