Employer Provided Educational Assistance is Tax-Free

The IRS defines a fringe benefit as a form of pay for the performance of services.  Most of these employer- provided perks are taxable to the employee.

One type of benefit that is tax exempt is educational assistance.  Amounts that an employer pays for its employees’ education expenses are not taxable to the employee, and this includes items such as books, fees, equipment, supplies and tuition.  It does not include lodging, meals, or transportation.

Student loan payments are another form of educational assistance, but this category has a limited life in the current law.  Payments made from March 28, 2020 through the end of 2025 qualify.  These payments can be for principal or interest, and they can be paid either to the employee or to the lender.

As with most tax rules, there are some limitations. 

•         Only the first $5,250 paid to each employee each year is tax-exempt
•         The program can’t favor highly compensated employees
•         The program can’t provide more than 5% of its benefits during the year to shareholders or owners or their spouses or dependents
•         The program can’t offer employees the option of choosing taxable cash payments instead of educational assistance
•         The employer has to give reasonable notice of the program to eligible employees

Offering educational assistance can be a great recruiting tool for companies, but it needs to be a legitimate program offered to the employees.  It can’t be a secret perk saved only for the owners or upper management. Visit our website to learn more or contact an Alloy Silverstein advisor today.