One of the many elements of business ownership and management is attracting and retaining productive employees. Offering the right mix of employee benefits tailored to your employee population can play an important role in that process. One area of employee benefits to consider offering depending on employee demographics is educational assistance. Luckily there are several to choose from so that you can tailor your offering to best meet your employee needs.
Qualified Student Loan Payment Matching Provision
The newest and perhaps most talked about offering is the qualified student loan payment (QSLP) match, which was codified in the SECURE 2.0 Act of 2022. A QSLP is an employee’s repayment of a higher education loan for the employee, his or her spouse, or dependents (at the time the debt was incurred). Employers can treat these repayments as salary deferrals under a 401(k), 403(b), or governmental 457(b) plan for matching contribution purposes. A plan can add a QSLP and related matching contributions beginning with the 2024 plan year.
Student loan payments may be treated as a QSLP as long as the total loan payments along with any elective deferrals made by the participant do not exceed the Internal Revenue Code §402(g) salary deferral limit ($23,000 for 2024). The payments do not count, however, towards the plan’s actual deferral percentage (ADP) test. Participants will need to annually certify to their employer that the QSLP has been made.
Educational Assistance Program & Student Loan Repayment
Employers may also consider offering an educational assistance program (EAP). Employers can offer up to $5,250 annually in tax-free benefits to pay for tuition and other education expenses for the employee. As a result of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), effective for payments made after March 27, 2020, an EAP can also be used to pay principal and interest on an employee's qualified education loans. Payments made directly to the lender, as well as those made to the employee, qualify. Under current law, this option will be available until Dec. 31, 2025. The EAP must be in writing and must not favor highly compensated employees. It may not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
Working Condition Fringe
If an employer desires to pay more than $5,250 tax-free in educational assistance, it may be possible if the benefit is a working condition benefit. This is a facts and circumstances analysis that will depend on the specific circumstances. Degree programs as a whole don't necessarily qualify as a working condition benefit. Each course in the program must be evaluated individually for qualification as a working condition benefit.
For the educational reimbursement to be a working condition benefit, the education must meet at least one of the following tests.
- The education is required by the employer or by law for the employee to keep their present salary, status, or job. The required education must serve a bona fide business purpose of the employer.
- The education maintains or improves skills needed in the job.
Employers can draft these to require employees receiving minimum grades to be reimbursed, to limit the type of courses they will pay for, and to include a claw back if an employee leaves a short time after receiving a benefit under the plan.
However, even if the education meets one or both of the above tests, it isn't qualifying education if it:
- Is needed to meet the minimum educational requirements of the employee's present trade or business (even if an employee is already performing a service, this does not establish that the employee has met the minimum requirements of the job), or
- Is part of a program of study that will qualify the employee for a new trade or business.
Generally, education courses that qualify an employee for a new position or specialty within their existing trade or business are not excludable as a working condition fringe benefit. These are considered to be qualifying an employee for a new trade or business. In a school context, examples of excludable courses that qualify employees for a new position rather than a new trade or business include:
- Teacher to principal
- Elementary school teacher to secondary school teacher
- Teacher in one subject area to teacher in another subject area
- Teacher to guidance counselor
Company Scholarship Programs
Usually found in larger businesses, a company can set up a company scholarship program which is normally administered by a company-created private foundation. These foundations may give preference in awarding scholarships to employees or their children or relatives. These scholarships will be taxable expenditures unless the grant program meets the requirements for individual grants and receives advance approval from the IRS.
The program must ensure that the scholarships awarded are for the main purpose of furthering the recipients' education rather than compensating company employees. Certain conditions and tests must establish three facts:
- The preferential treatment derived from employment must not have any significance beyond that of an initial qualifier,
- The selection of scholarship grantees must be controlled and limited by substantial non-employment related factors, including a selection committee of individuals who are independent and separate from the private foundation, its organizer, and the employer concerned, and
- There must exist only a limited probability that qualified employees or their children will receive scholarship grants.
Qualified Tuition Program
Finally, an educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's wages. Tuition reduction for undergraduate education generally qualifies for this exclusion if it is for the education of a current employee, a former employee who retired or left on disability, a surviving spouse of an individual who died while an employee, a surviving spouse of a former employee who retired or left on disability, or a dependent child or spouse of any individuals listed previously.
Tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who performs teaching or research activities for the educational organization.
For more information about tax benefits for education including credits and deductions available to individuals see the IRS Publication 970. If you are interested in learning more about educational benefits you can offer your employees, please reach out to any of the attorneys in our Employee Benefits group.
