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Employers can leverage educational assistance programs to enhance their workforce’s skills while providing tax benefits.
On June 17, 2024, the IRS answered frequently asked questions related to educational assistance programs.
Overview of Educational Assistance Programs
An educational assistance program (EAP) is a written benefits plan provided by an employer to offer educational assistance to its employee. Benefits of up to $5,250 per year provided under an EAP may be excluded from the employee’s gross income, resulting in no tax to the employee on that benefit. EAP benefits can include payments for tuition, books, supplies, and equipment for either undergraduate or graduate coursework. EAP benefits may also include principal or interest payments on qualified education loans. The amounts paid under a valid EAP are generally also deductible as a business expense by the employer.
An EAP must be established in a written plan. The IRS provided a sample plan for employers to tailor to their needs, including setting its own conditions for eligibility, participation, and proration of benefits for part-time employees. However, an EAP cannot set conditions or requirements for its plan that discriminates in favor of officers, shareholders, self-employed, or highly compensated employees. Specifically, no more than 5% of the total benefits paid under the EAP can go to shareholders and owners.
Educational Loan Payments
Inclusion of educational loan payments in an EAP can provide a significant benefit to employees. However, the FAQs outline the strict criteria for properly establishing loan payment assistance:
- Payments must be made for a “qualified” loan at an eligible educational institution as determined by the Department of Education and generally includes any college, university, vocational school, or other postsecondary educational institution.
- Payments must be made between March 27, 2020, and January 1, 2026 (unless extended by future legislation).
- Payments may be made directly to a third party, such as a loan servicer, or directly to the employee
- The EAP plan generally must explicitly include educational loan payments
- The educational loan payments must be for the exclusive benefit of the Payments made to loans for the employee’s spouse or dependents cannot be excluded from the employee’s gross income.
Implementation of an EAP
Employers looking to enhance their employee benefit plans may choose to establish an education assistance program. Implementation requires careful planning and communication so that the employer and participants can take advantage of the of the favorable tax treatment associated with the benefits. To establish and manage an effective EAP, employers should:
- Develop a Clear Written Plan
Detail the eligibility, benefits, and administration of the program. The plan should explicitly state the types of educational assistance provided, including loan repayments if applicable. Employers should also ensure that the plan complies with Section 127 requirements and non-discrimination rules.
- Communicate with Employees
Inform employees about the availability and benefits of the educational assistance program and provide clear guidelines on participation, the types of expenses covered, and the process for receiving benefits. Regular communication ensures that employees are aware of the program and can take full advantage of the benefits and favorable tax treatment.
- Keep Records
Maintain thorough records of all educational assistance payments and related documentation. This includes receipts, invoices, and proof of qualified education loan payments. Accurate record-keeping is essential for compliance and can help resolve any future tax-related audits or assessments.
- Review and Update the Plan
Periodically review the educational assistance program with legal counsel to ensure it remains compliant with current tax laws and regulations. Update the plan as necessary to reflect changes in the law or company policies. Be sure to keep plan participants informed of any changes to the program.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
