Tax code

Two ways to reconcile educational assistance benefits with the tax code


Employees are quitting their jobs at an alarming rate. Some experts call it the Great Resignation. Since we can’t imagine anything smarter, we’ll stick with it. Unfortunately for businesses, hiring is both exhausting and expensive. In fact, it is much cheaper to keep employees than to find new ones.

In such a seller’s market, how do you retain employees and keep them motivated? One option to consider is to increase your benefits to provide educational assistance benefits. This can be an attractive benefit for new and existing employees. Education assistance will also benefit employees who have been on long-term leave and need to upgrade their skills.

If you plan to distinguish your business in this way, the tax code offers you two ways to approach it: easy way and hard way.

The easy way

IRC § 127 allows you to provide up to $ 5,250 per year to employees in tax-free educational assistance benefits, with few conditions.

Your educational assistance program must be a separate written plan and meet the following requirements:

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  • It benefits those employees who qualify under the rules you have established.
  • Your rules cannot favor highly paid employees.
  • The program does not provide more than 5% of its benefits to shareholders or owners, or their spouses or dependents.
  • Employees cannot choose to receive money or other taxable benefits instead of educational assistance. In other words, you cannot offer this program through your cafeteria plan.
  • You give reasonable notice of the program to eligible employees.
  • Employees justify their expenses to you.

Your shot can be as wide or as narrow as you want. Employees can use their § 127 benefits for personal purposes, such as finding an undergraduate or graduate degree unrelated to their current job, or they can take business courses that will enable them to meet the minimum requirements for promotion.

Limit # 1: You generally cannot pay or reimburse employees for courses considered sports, games, or hobbies.

Limit # 2: If you are already repaying certain employee student loan expenses, you must subtract the amount you are repaying from the current employee education assistance entitlement.

Hard

If you don’t want to be bothered by monetary ceilings, IRC § 162 allows you to recover or reimburse 100% of training costs related to employee employment. This type of education allows employees to maintain or improve their current skills, without qualifying them for new jobs. It also includes the education required by law or by you.

Why is this the hard way? Because the trick is to make education expenses eligible for tax-free treatment in the first place. Since going to school is inherently personal, the IRS interprets this section of the tax code very closely. For example, you can never pay the expenses associated with undergraduate degrees; higher education spending is doing a little better.

Example. David performs sales, marketing and management duties for Sparky. He continues to do so during his graduate studies for his MBA and after graduation. Sparky can exclude these expenses from David’s income as earning an MBA is not a prerequisite for doing his current job. Although the MBA improves his business, marketing, and sales skills, it does not qualify him to perform tasks and activities that are significantly different from those he could perform prior to the MBA.

In addition, the logic of the IRS is circular. So you can pay for the courses that employees need to maintain or improve their current skills, but you cannot exclude these expenses from employees’ income if the education allows them to meet the minimum requirements of their current jobs or qualifies them. for new jobs, although at the same time the training maintains or improves the skills that employees currently need.

Might vs. intend : To determine whether a course qualifies an employee for a new trade or business, consider what they could do with their newly acquired knowledge, rather than what they intend to do. If education qualifies an employee to perform tasks and activities that are very different from those they could previously perform, education qualifies them for a new trade or business.

At the end of the line : Because qualifying for tax-free treatment under IRC § 162 is risky, expenses for employment-related education assistance should be limited to seminars or refresher courses.


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