Accomplishing your current human resources goals and assuring that an adequately-trained staff stand ready to meet the future needs of your business drive many employers toward offering educational assistance programs. For employees, this represents a tax-free benefit. Grants and scholarships under IRS section 117a, as well as employee assistance programs under IRS section 127 commonly apply. But, section 132d provides a third and usually most-advantageous program. You may operate under several IRS sections simultaneously.
IRS Section 132d - Fringe Benefits
Any deduction an employee would normally be allowed under section 162 on their income tax becomes tax-free to the employee under an IRS section 132d, employer education assistance program. Travel, meals and professional dues are typically covered, as well as education expenses that help employees maintain or improve their job skills. Employees who must meet certain educational requirements for their current position also qualify under this section. You will not find written plan requirements or dollar limits on the amount spent in the program. According to the Journal of Accountancy, section 132d has more flexibility than the other two options.
IRS Section 117a - Grants and Scholarships
Section 117a, one of the three IRS sections addressing employer education assistance programs, focuses on grants and scholarships. The costs of books, fees and tuition, as well as required instructional supplies and equipment earn tax-free status for the employee when covered under this section. Only degree candidates who attend authorized institutions qualify under this section of the regulations. Therefore, not all employee studies are suitable candidates for this type of assistance.
IRS Section 127 - Employee Assistance Programs
Section 127 allows employer spending of up to $5,250 per employee in tax-free benefits toward the expenses of educational programs associated with the employee's employment relationship, as of 2011. According to IRS.gov, you should not show any educational assistance provided to your employee on his W-2 unless it exceeds this $5,250 limit. Qualifying undergraduate or graduate-level expenses include payments for books, equipment, fees and similar expenses, supplies, and/or tuition. These programs tend to be expensive for employers and can also create an administrative burden. The plan must remain open to all employees seeking graduate and undergraduate education and a formal, written plan must exist.
Optional Employer Stipulations
As designer of your business' employee education assistant program, you possess many flexible options. Will you stipulate a minimum grade point average to remain in the program? Will you establish a sliding scale of payment with an A being 100 percent reimbursement and offering lower reimbursement for lower grades? What majors will you fund? Will you pay tuition directly or in the form of reimbursement? Must employees remain employed for a minimum period of time after you fund their degree? Will you cover books and materials or just tuition? Using creativity during the development stage of your education assistance program helps you create a program that suits the needs of your business.