Employer Tuition Assistance
May 18, 2009
Your employer may provide you with up to $5,250 in employer education assistance benefits for undergraduate or graduate courses tax-free each year. The benefits must have been paid for tuition, fees, books, supplies, and equipment. In certain circumstances payments above $5,250 may also be tax-free.
About one-twelfth of undergraduate students and one-fifth of graduate students (two-fifths of MBA students) receive employer tuition assistance.
$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 benefits must have been paid for tuition, fees, books, supplies, and equipment. These expenses must have been incurred for the education of the employee and not for the employee’s spouse or dependents. Tools or supplies that may be retained by the employee after the course of instruction are excluded. (Textbooks may be retained after course completion.) Travel, lodging and meals are not included. Courses involving sports, games or hobbies are not included, unless they are required as part of a degree program or are related to the business of your employer.
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.
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