Education Assistance as an Employee Benefit

Today, the rising cost of higher education prevents many employees from furthering their education. Your employer may be able to offer you the opportunity to continue your education by providing you with educational assistance. Employer-sponsored educational assistance can help you improve your skills through education that you otherwise may not have been able to afford. In addition, the IRS treats certain types of educational assistance as nontaxable income. There are a number of ways for your employer to provide you with educational assistance, including educational assistance plans (EAPs), educational reimbursement programs (ERPs), tuition reduction programs, educational benefit trusts (EBTs), scholarships/fellowships, and training programs. Caution: The IRS sometimes treats educational benefits that exceed certain limits as taxable income.

Educational assistance plans

Under an educational assistance plan (EAP), your employer pays for expenses that you incur for education. The IRS interprets the term "education" broadly to include any type of training or instruction that improves the employee's skills. In addition, the education need not be part of a formal degree program. Generally, the education expenses include tuition, fees, books, and supplies. For 2002, if your employer's EAP meets IRS guidelines, the IRS allows your employer to reimburse you up to $5,250 per year tax free for educational expenses (both undergraduate and graduate) that are not job-related. For more information on IRS guidelines for EAPs, see Section 127 of the Internal Revenue Code.

If you are an employee who is active, retired, or disabled, you can receive benefits from your employer's EAP. In addition, if you are a former employee, you can continue to receive benefits from an EAP regardless of the circumstances of your termination.

If your employer's educational assistance exceeds the $5,250 limit, you may still be able to receive tax-free educational assistance if it qualifies as a working condition fringe benefit. Working condition fringe benefits include any service or property that your employer provides to you such that if you paid for the property or service yourself, you could claim the payment as a deductible business expense.

Educational reimbursement program

Under an educational reimbursement program (ERP), your employer either fully or partially reimburses you for education and training. Your employer can exclude ERP reimbursements from your gross income if they qualify as working condition fringe benefits. Working condition fringe benefits include any service or property that your employer provides to you such that if you paid for the property or service yourself, you could claim the payment as a deductible business expense.

In order for educational reimbursements to qualify as working condition fringe benefits, the cost of the education must be for job-related education. If the course maintains or improves skills that you use in your present job, or if it is required by your employer in order for you to keep your present job, it is job-related and therefore excluded from your gross income as a working condition fringe benefit. On the other hand, if the education helps you satisfy the minimum qualification requirements for your present job or qualify for a new trade or business, the education is not job-related, and your employer cannot exclude the expenses from your gross income. There is no dollar limit on exclusions for educational reimbursements if they qualify as working condition fringe benefits.

For more information on working condition fringe benefits, see section 132 of the Internal Revenue Code.

Tuition reduction program

If you work for a school, college, or university, your employer may provide either full or partial tuition reduction for either you or your family members. In order for your employer to exclude the cost of the tuition reduction program from you or your family member's gross income, your employer must be an educational organization that offers tuition reduction to the following individuals: employees, retired employees, employees separated from service due to disability, surviving spouses of deceased employees, spouses of employees, dependent children of employees, and children of a deceased employee if both parents are dead. An educational organization is an organization whose primary function is the presentation of formal instruction, that normally maintains a regular faculty or curriculum, and that has a regularly enrolled body of students in attendance at the place where it carries on educational activities. Tuition reduction only applies to education below the graduate level.

Educational benefit trust

An educational benefit trust (EBT) is a trust arrangement that allows your employer to accumulate funds to pay educational expenses for your children. If your employer properly structures the EBT, the EBT can defer tax on the educational benefits that your employer provides to your children until the benefits are paid out.

Scholarships and fellowships

Employee scholarships provide you with funds to further your education at an educational institution. Employee fellowships provide you with funds to assist you in the pursuit of additional study or training. As long as certain qualifications are met, both employer-provided scholarships and fellowships are excludable from your gross income.

Training programs

Your employer may provide you with on-the-job training for a number of reasons, such as employee orientation or computer training. The IRS allows your employer to exclude the fair market value of on-the-job training from your gross income, since it is job-related and therefore qualifies as a working condition fringe benefit. Training programs are job-related because they either maintain or improve skills that you use in your present job, or because your employer requires them in order for you to keep your present job. Working condition fringe benefits include any service or property that your employer provides you with such that if you paid for the property or service yourself, you could claim it as a deductible business expense.

Deductibility of educational expenses

If your employer does not provide you with educational assistance, or if your employer's educational assistance only lasts within certain limits, you may be able to deduct some or all of your qualified higher educational expenses. If your adjusted gross income (AGI) is less than $65,000 ($130,000 for joint filers), the maximum deduction you're entitled to is $3,000 in years 2002 and 2003, and $4,000 in years 2004 and 2005. If your AGI is between $65,000 and $80,000 ($130,000 and $160,000 for joint filers), a maximum deduction of $2,000 is available in years 2004 and 2005. The deduction is not available after 2005.

This deduction for higher education expenses can't be claimed for expenses that were paid with tax-free withdrawals from a Coverdell education savings account (formerly known as an education IRA), or that were used to determine the amount of interest that can be excluded from income on the redemption of certain U.S. savings bonds.