Talking about $5,250: The Tax Implications of Tuition Reimbursement

 

February 19, 2024
6 min read

As they struggle to regain a competitive advantage in constricting labor markets and a rapidly advancing technological environment, employers in a diverse range of industries are wrestling with HR and employee benefits issues. With significant benefits to both employers and employees, education assistance programs can be a powerful offensive weapon in this battle. Underutilization of such programs, however, may be a continuing impediment to employers’ efforts to close skills gaps and shore up their succession planning.

 

Employers should do all they can to understand the tax benefits and implications of employee tuition assistance programs. It’s never too late to have the discussion about the $5,250 educational assistance tax credit and its implications for your skills gaps, employee learners and organizational objectives. Powerful and easy-to-use tools from DeVryWorks, like our new downloadable presentation template: Business Case for Implementing a Tuition Benefits Program, make it easy to turn up the volume and make your case strategically to organizational stakeholders.

Benefiting Employers and Employee Learners

Tuition benefits are mutually beneficial to employers looking to close skills gaps and employees who are eager to take on new skills and responsibilities.

For employers, a well-configured tuition assistance program:

  • Provides a cost-neutral solution:

    Employers can take up to $5,250 per employee, per year, as a tax deduction. Matching employee learners’ annual tuition reimbursement or assistance to that amount makes the benefit cost-neutral to the employer.   

  • Assists in leadership development:

    Existing employees know the company and its culture, and have verifiable experience. Through a tuition benefits program, you can significantly improve internal promotability, helping to fill skills gaps with people who are known quantities.

  • Makes for a compelling talent acquisition tool:

    In a survey of 22,000 recipients of tuition assistance, 84% said the incentive was an important factor in their decision to join their company.

     

  • Enhances employee retention:

    When offered tuition assistance, employees are likely to feel they have a purpose and a connection to the company. This increased satisfaction typically results in more retention and less turnover. As detailed in the DeVryWorks 2023 Talent Outlook Study, 72% of respondents indicated that professional development is part of the reason they’re able to retain their top talent.

     

According to SHRM research, opportunities for growth within the workplace represent the single-biggest factor in employees’ overall well-being, surpassing even job security, and are a key factor in their decision to remain with their current employer rather than seeking a position elsewhere. For employee learners who may be eager to acquire the new skills to enable this advancement but deterred by the prospect of student loan debt, a tuition assistance program can help them:

 

-     Position themselves for promotion to higher-level positions within the company.

 

-     Acquire portable skills and certifications that are relevant to current technologies.

 

-     Achieve a life-long dream of college education.

 

-     Pay very little or none of the costs of their education.

 

-     Avoid student loan debt.

An underutilized benefit

In spite of the upside to employers and their employee learners, tuition assistance programs remain an underutilized benefit. As indicated by the Lumina Foundation’s research, nearly half of employers offer tuition benefits, but they are only utilized by 2 to 5% of eligible employees and 43% of working adults are unaware the benefit is available to them.

This calls for an all-out effort by employers to demonstrate their dedication to skill-building initiatives and include tuition assistance in Open Enrollment discussions.

The Tax Implications of Tuition Benefit Programs

Whether your program is based on tuition reimbursement, requiring employees to pay tuition and expenses up front, or a tuition assistance program where the company pays the educational institution directly, the same tax benefits and implications apply.

Under Section 127 of the IRS tax code, employers can offer up to $5,250 per student per year to cover broad categories of educational expenses, including tuition, fees, books, supplies and equipment. The code excludes payments for meals, lodging and transportation, and tools or supplies the employee learner retains.

Employers may opt to offer more than $5,250 to make total rewards packages more competitive, strengthen their commitment to ongoing learning and development or meet the needs of employees pursuing more costly education paths, but benefits exceeding $5,250 annually are considered wages, and are subject to federal income and payroll tax withholding.

A notable limitation is that the benefit may not be provided to highly compensated employees – those who are in the company’s top 20% of earners.

Don't leave money on the table

HR and operational leaders are encouraged to consult with their finance teams to develop plans that consider all of the tax implications and how to fully optimize the annual $5,250 per employee benefit. Concurrently, with a clear understanding of the scope and breadth of the skills gaps that hinder their operations and succession planning, they should partner with an educational institution to establish the learning pathways that will narrow those gaps in the most efficient way.

Tuition Assistance and Open Enrollment: Perfect Together

Any time is the right time to encourage your employees to tap into their tuition benefits program, but Open Enrollment provides a portal through which managers and team leaders can stimulate meaningful discussions within the context of current skills gaps.

Through meaningful career conversations and relevant learning pathways, you have the opportunity to transform this passive or overlooked benefit into a powerful mechanism for talent development, engagement and retention.

Before activating the bullhorn, be sure you’ve fine-tuned your program and clarified the criteria:

-     Is the benefit available only to full-time employees? 

 

-     Is it available to new hires or is there a waiting period? 

 

-     Does it cover new coursework only, or can employees use it to pay off existing student loan debt? 

 

-     What types of courses or degree programs are applicable? 

 

-     How well have you aligned this with your skills needs? 

 

-     Will you be reimbursing employees or paying education partners directly?

 

Here are some suggestions for getting these conversations started:

 

-     Encourage employees to review the company’s education benefits program  as part of their overall benefits package, emphasizing any program upgrades or modifications.

 

-     Well before Open Enrollment kickoff, emphasize the tuition benefits program in regular employee communications like newsletters and email campaigns.

 

-     Following best practices for open enrollment communications, send detailed information a few weeks before kickoff, then midway through the Open Enrollment period.

 

-     Hold in-person meetings with employees and team leaders.

 

-     Use town hall meetings to convey information about the program and solicit employee questions and feedback.

How can DeVryWorks help?

DeVryWorks can partner with you to implement meaningful change:

·        Help you to institute a comprehensive and inclusive tuition benefits program or fine-tune your existing program to expand employee participation and better meet the skills challenges you currently face.

·        Develop the learning pathways to upskill or reskill talent to meet the demands of advancing technologies.

·        Reduce your reliance on recruiting, hiring and training new talent.

·        Improve talent retention and engagement.

Related Content

Make Your Business Case for a Tuition Benefits Program

When you download our presentation template: Business Case for Implementing a Tuition Benefits Program, you’ll have a powerful tool to convince organizational stakeholders of the benefits of a robust, equitable and skills-aligned tuition benefits program:

-     Illustrate the benefits of implementing a tuition assistance program as a means of attracting, retaining and growing talent.

-     Firm up your case with examples of peer companies that have made such programs a key part of their gap-closing upskilling strategies.

-     Integrate positive employee feedback from engagement surveys or other measurement tools.

-     Address common stakeholder concerns and present an action plan to assess potential risks.

-     Explain how a direct payment plan agreement with educational partners can remove employees’ financial obstacles and stimulate enrollment. 

Request the Template