QUESTION: If our company sets up a qualified educational assistance program, what expenses can the program reimburse? For example, can we limit reimbursements to courses that are related to our business?
ANSWER: The Code’s qualified educational assistance rules generally allow any form of instruction or training “that improves or develops the capabilities of an individual” to be reimbursed. The education can be part of a degree-granting program (including graduate-level courses), but it does not have to be. Reimbursable expenses include, but are not limited to, tuition, fees and similar payments, and books. Also, after March 27, 2020, and before January 1, 2026, employers may also provide educational assistance by paying an employee, or reimbursing the employee’s lender, for the principal and interest on a qualified education loan incurred by the employee for the employee’s education (see our Checkpoint Question of the Week). Of course, there are some restrictions:
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The education cannot relate to a sport, game, or hobby, unless it involves the employer’s business or is required as part of the student’s degree program.
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Meals, transportation, and lodging cannot be reimbursed.
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Supplies and equipment (other than textbooks) can only be reimbursed if they cannot be kept after the course is completed.
Qualifying expenses can be reimbursed tax-free up to $5,250 per calendar year. A program does not have to stop providing benefits when that limit is met, but any reimbursements exceeding that limit will be taxable unless the excess benefits can be excluded under another Code provision (e.g., the working condition fringe benefit rules).
Employers are not required to offer reimbursements for all the various expenses that are eligible for tax-free reimbursement under the qualified educational assistance rules. For example, your company’s program could limit the types of courses that are eligible (e.g., only courses at a fully accredited two-year or four-year college) or the expenses that can be reimbursed (e.g., only tuition). Reimbursement could also be conditioned on attaining a specified minimum grade or remaining employed with your company for a certain amount of time after completing the education. It could also be subject to a per-employee limit, an aggregate reimbursement limit for the program, or both. In addition, your company could require course approval as a condition of reimbursement. Pre-approval might be useful if your company wants to limit courses to those that are related to your business. Note, however, that if your company is only interested in reimbursing courses that are so work-related that an employee could take a business tax deduction for them, you might not need a qualified educational assistance program. Deductible work-related education expenses can be paid for by an employer under the working condition fringe benefit rules or the accountable plan rules if the rules applicable to those exclusions are met.
Eligible employees must be given reasonable notice of the program’s availability and terms, so if your company establishes restrictive criteria for reimbursable courses, those criteria should be included in the disclosure. If your company retains discretion to approve courses, that too should be disclosed. Additionally, any rules your company establishes for its program must not discriminate in favor of highly compensated employees and must satisfy other requirements applicable to qualified educational assistance programs. For example, federal and state discrimination laws should be considered, especially if your company retains significant discretion.
For more information, see EBIA’s Fringe Benefits manual at Sections X.C (“Types of Educational Assistance That Can Be Offered”) and X.F (“Design Choices Checklist”).
Contributing Editors: EBIA Staff.