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.
$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. (The expansion to graduate students was added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), effective on or after January 1, 2002.)
Your employer may require you to attain a particular grade or to complete a program in order to obtain reimbursement. Your employer may also require that you remain employed for a period of time after completing the course of study. 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.)
The term "highly compensated employee" is defined in section 414(q)of the Internal Revenue Code as an employee that was a 5-percent owner at any time during the current or previous year, was in the top 20% of employees when ranked by pay during the previous year, or total compensation exceeded a particular threshold during the previous year. The income threshold was $105,000 if the previous year was 2008 and $110,000 if the previous year was 2009 and is adjusted annual for cost of living.
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.
These working condition fringe benefits are not subject to the highly compensated employee restrictions that apply to other employer tuition assistance programs.
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.
Government Surveys and Statistics
The best source of data concerning the use of employer tuition assistance is the National Postsecondary Student Aid Study (NPSAS) conducted every four years by the National Center for Education Statistics (NCES) at the US Department of Education. This is a very large statistically significant survey of undergraduate and graduate students about how they paid for college.
The following table is based on the 2003-04 NPSAS. In addition, approximately 41.5% of MBA students (a subset of graduate students) received employer tuition assistance, with an average amount of $4,448.70, number of recipients of 127,600, and total amount received of $567,654,000.
The following table is based on data from the 2007-08 NPSAS. In addition, approximately 39.0% of MBA students (a subset of graduate students) received employer tuition assistance, with an average amount of $6,271.10, number of recipients of 163,800, and total amount received $1,027,206,000.
NCES also periodically gathers information about employer tuition assistance as part of the National Household Education Survey Program. According to Table 6 of the 2004-05 Adult Education Survey, 91% of employed adults who were engaged in formal learning activities received some employer support. 83% received financial support for tuition, books and materials.
The US Census Bureau asked detailed questions about employer tuition assistance in the Survey of Income and Program Participation (SIPP) but the most recent data dates to 2001.
The Office of Management and Budget provides a spreadsheet summarizing tax expenditure estimates relating to individual and corporate income tax returns. This estimates the cost of the "Exclusion of employer-provided educational assistance" at $630 million in 2007, and $660 million in 2008 and $690 million in 2009.
The Bureau of Labor Statistics Employee Benefits Survey includes data concerning the percentage of employees with access to work-related education assistance. The figures for all private industry were 41% in 1999, 38% in 2000, 49% in 2005 and 49% in 2006. The percentages for professional and technical employees was 62% in 2000 and 73% in 2007. The percentages for full-time employees were 56% in 2005, 56% in 2006 and 56% in 2008 and the percentages for part-time employees were 25% in 2005, 26% in 2006 and 28% in 2008. The percentage at medium and large private employers was 67% in 1997. 68% of state and local government workers had access to work-related education assistance in 2007. (This is the most recent data available.) Table 25 of the National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2007 showed that union employees were more likely to get work-related education assistance than nonunion employees (57% vs 48%) and that employees at larger employers (100 or more employees) were more likely to get work-related education assistance than employees at smaller employers (66% vs 34%). Table 26 of the National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2008 showed that union employees were more likely to get work-related education assistance than nonunion employees (57% vs 49%), that employees at colleges (89%) were the most likely to have work-related education assistance, and that employees at larger employers (100 or more employees) were more likely to get work-related education assistance than employees at smaller employers (67% vs 34%). The detailed breakdown was 31% (1-49 employees), 40% (50-99 employees), 57% (100-499 employees) and 79% (500 or more employees).
Private Surveys and Statistics
There are also a variety of privately-conducted surveys. These surveys report inconsistent results concerning the percentage of employers that offer tuition reimbursement programs. This may have to do with whether the surveys focused on all employers or just on large employers. Differences in the number of employers surveyed may skew the results from one year to the next. Most of these survey results are not scientific. There is also very little information that is up-to-date.
A Challenger, Gray & Christmas, Inc. Corporate Cost-Cutting Survey of 100 human resources executives released on January 26, 2009 found that 10.8% of those surveyed eliminated or reduced tuition reimbursement programs in response to the credit crisis and recession.
A 2008 survey by Hewitt Associates LLC of 1,287 large employers found that 88% offered some form of tuition reimbursement. The 2005 survey of 1,000 employers found that 75% offered tuition reimbursement and 78% offered some form of education assistance. The average reimbursement amount was $5,000. Their 1993 survey of 858 employers reported 99% providing tuition reimbursement.
A July 2008 survey by Institute for Corporate Productivity of 493 companies found that 80% offered some form of tuition reimbursement to their employees.
The International Foundation of Employee Benefit Plans (IFEBP) conducts periodic surveys on tuition reimbursement. The June 2006 survey found that 94% of employers offered some form of education assistance to their employees, with 99% providing such benefits to full-time salaried employees and 86% to full-time hourly employees. The 2002 survey reported an average payment of $3,906 with a median of $5,000. The 2000 survey reported that 88% of employers found tuition reimbursement to be a useful employee retention tool and that 23% require employees to repay part of the benefit if they leave within a specified period of time.
A 2006 survey by Mercer Human Resource Consulting of 1,000 large employers found that 85% offered their employees some form of tuition reimbursement.
A 2003 survey of job seekers by Lee Hecht Harrison found that 53% were looking for employer tuition assistance. This compares with 40% in the 1999 survey.
The 2002 Benefits Survey of 510 employers by the Society for Human Resource Management (SHRM) found that 79% offered education assistance programs.
A 2000 survey of employers by Manchester Inc. found that 66% of employers cited tuition reimbursement as the employee benefit that is most effective in retaining front-line employees.
Additional information and insights may be found at the following resources:
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