Employer Tuition Assistance
Employer tuition assistance includes a variety of employer-sponsored programs to help employees and their dependents pay for college. In many cases the funds received from these programs will be excluded from income and hence tax-free. Employer tuition reimbursement programs are especially popular with students pursuing an MBA. Also, check out Fastweb's Employer Tuition Assistance Programs for further information.
$5,250 Exclusion from Income
Your employer may provide you with up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year, per section 127 of the Internal Revenue Code. You do not need to be degree-seeking.
Your employer may require you to attain a particular grade or to complete a program in order to obtain reimbursement. The employer may also require that you remain employed for a period of time after completing the course of study. Finally, your employer may require you to provide receipts or other substantiation of the educational expenses. Employers may provide these benefits to retired, disabled and laid-off former employees in addition to current employees.
The $5,250 limit applies to the sum of all employer education assistance benefits received from all employers during the tax year. It is a combined limit, so you cannot multiply the exclusion by working for several employers.
The educational assistance program established by your employer may not discriminate in favor of highly compensated employees or employees who are the spouses or dependents of highly compensated employees. Employer tuition assistance that is included in a union contract is excluded from this restriction provided that the benefits were the result of a good faith bargaining between the union and employer. There is also a restriction that no more than 5% of the educational assistance paid each year can be provided to shareholders who each own more than 5% of the stock of the employer. (Similar restrictions apply to businesses that don't issue stock, such as an unincorporated business.)
Working Condition Fringe Benefits
Payments above $5,250 may also be tax-free, if they represent a working condition fringe benefit within the sense of IRC Sections 162 and 212. This means that if you had paid for the expenses, you would have been able to deduct them as an employee business expense. To do so the expenses must have been paid to improve or maintain job-related skills or must have been required by the employer (or by law) for the employee to remain employed in that job or at the same rate of compensation for a genuine business purpose of the employer.
However, expenses for education that is required for the employee to satisfy the minimum educational requirements for qualification in the employee's job are not deductible and so do not qualify for tax-free treatment if paid by the employer. Likewise educational expenses to qualify the employee for a new trade or business (that is not of the same general type of work as the employee's current job) are not deductible and do not qualify for tax-free treatment if paid by the employer.
Tuition Waivers and Reductions
Colleges and universities may offer employees tuition waivers or tuition reductions for undergraduate education under IRC Section 117(d), provided that the benefit does not discriminate in favor of highly compensated employees. (The tuition waivers associated with graduate teaching and research assistantships are also excluded from income.)
Employers may also award scholarships to dependents of employees so long as the amounts do not require past, present or future teaching, research or other services by the student to the employer as a condition for receipt of the award. (There is an exception if the teaching or research services are required of all degree candidates regardless of whether they are a recipient of a scholarship or fellowship.) Only amounts paid for tuition and fees are excludable from income; amounts paid for a living stipend must still be reported as income. The student must be enrolled in a degree-seeking program.
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