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Employer-Paid Education Expenses Tax Advantages

by | Jan 21, 2024 | education assistance plans

Reimbursements for Job-Related Qualified Education Expenses

An employer can give employees unlimited tax-free reimbursements to cover qualified education expenses. In a nutshell, qualified education expenses are for education that:

If required by the employer or by law or regulation to retain an employee’s current job or
Maintains or improves skills needed for an employee’s current job.
The company can also directly pay qualified education expenses on an employee’s behalf with the same favorable tax treatment. Such reimbursements or payments are tax-deductible and not subject to federal payroll taxes. 

Note: Qualified education expenses don’t include education costs that qualify an employee for a new occupation or profession. Suppose an employer pays for that kind of education. In that case, the payments count as additional taxable compensation for the employee, subject to income and payroll taxes — unless they’re run through a Section 127 educational assistance plan.

Educational Assistance Plans

An employer can offer a Sec. 127 educational assistance program that gives each participating employee up to $5,250 in annual tax-free reimbursements. The employer can deduct the costs of operating a Sec. 127 plan as a business expense without owing any federal payroll taxes.

The tax rules permit these plans to cover just about anything that constitutes education, including graduate coursework, whether job-related or not. There are only two tax-law restrictions:

1.The education must be for the employee rather than another member of the employee’s family; and

2. The plan can’t pay for courses involving sports, games, or hobbies unless they relate to company business.

Plans may reimburse employees only for education that’s job-related. What’s reimbursable is left to the employer’s discretion when setting up the plan.

As a bonus, Congress enacted legislation in 2020 that allows federal-income-tax-free treatment for payments made by employer-sponsored Sec. 127 educational assistance plans toward student loan debts of participating employees. This deal covers payments made under Sec. 127 plans through December 31, 2025. The annual limit is $5,250 for any combination of education expenses and student loan payments.