Establishing a Tuition-Reimbursement Program

Supporting your employees efforts to advance their education through tuition-reimbursement can be costly but it can also help improve job satisfaction, productivity and employee loyalty, making your business even more successful. Tuition-reimbursement is also an effective recruiting tool, attracting ambitious employees concerned about the cost of education.

The first step to take when considering creating a tuition-reimbursement program is to become familiar with federal tax law provisions under Section 127 of the Internal Revenue Code (“Code”). Generally these provisions:

• Require a formal written plan with reasonable notice of availability and plan terms to eligible participants
• Prohibit eligibility discrimination in favor of highly compensated employees and/or their dependants
• Define eligible employees
• Identify which expenses are eligible
• Set the maximum amount of reimbursed dollars to be excluded from gross income ($5,250 per calendar year)
• Prohibit employers from providing more than 5 percent of total annual benefits to individuals owning more than 5 percent of company stock or capital, or profit interests

See IRS publication 970, Tax Benefits for Education, http://www.irs.gov/pub/irs-pdf/p970.pdf

Once you’ve familiarized yourself with the regulations of having a tuition-reimbursement program, there are many other important decisions to make. Consider the following:

What you’ll reimburse. The Code allows employers to cover expenses other than tuition, such as books and lab fees, to be covered under education assistance programs. Employers may also choose to pay for time off if classes occur during normal working hours. Or employers may elect to only reimburse tuition.

Which providers and classes will be allowed. Will your employees be limited to community and state colleges or will you also reimburse courses taken at private universities? Will you reimburse courses for undergraduate or graduate degrees only or will you allow reimbursement for certificate programs or post-graduate work? Will you limit eligible classes to those directly related to future or current job responsibilities or leave the policy open?

Clearly spell out which type of classes for which you’ll pay. If you have doubts about the credibility of a course or program, ask the employee to bring in a course description.

Which employees are eligible. Most employers make these programs available to all employees, but you may choose to limit eligibility to full-time employees. You can also set terms to eligibility. For example, an employee must be employed for six months before the employee is eligible for reimbursement.

How much you’ll reimburse. While the code permits only a maximum annual $5,250 tax free reimbursement, you can reimburse above and beyond that amount or even limit reimbursement to a lower dollar amount each year. Some employers pay a percentage of the tuition, while others compensate according to grades: An “A” earns an employee 100 percent reimbursement while a “C” gets 50 percent.

As your employees begin to take advantage of your program, remember to encourage and support their educational pursuits. Help your employees balance work and school by allowing them to telecommute or work flex hours during exams and deadlines.

This article is not intended to constitute legal or tax advice. Please consult a tax or legal professional for advice.