Is there a tuition reimbursement program that I can offer as an employee benefit that also offers my business a tax advantage?

Barry S. Kleiman for NorthJersey.com writes: There is a tuition reimbursement, or educational assistance, program that can help enhance a company's business and offset the financial burden of education for employees. While most are commonly associated with a graduate education, the program can apply to any form of instruction or training and can even apply to courses that are not necessarily part of a degree program.

One of the most important and generous benefits a company can offer its employees is tuition reimbursement. It is a contractual arrangement between employer and employee that outlines specific terms under which the employer may pay for the employee's education. The company can tailor the criteria of the program as it sees fit. For instance, the company may require that the employee repay the company upon resignation or termination within a certain time period after completion of the courses. The company also may stipulate approval of the specific courses to be reimbursed and require the employee to maintain a certain grade-point average to qualify for reimbursement.

Providing a reimbursement program benefits the company by increasing employees' skills and value and improving their ability to contribute to the growth of the company. It also serves as an incentive for hiring and retaining employees. There also is a tax benefit, in that employers can deduct the tuition reimbursement as a business expense.

Employees not only receive an economic benefit in the form of a tuition break — the reimbursement is not taxable as long as the employer establishes a qualified Educational Assistance Program (EAP). To qualify, the EAP must be a separate, written plan for the benefit of employees (spouses or dependents do not qualify). Notice of the availability and terms of the program must be provided to eligible employees and the plan cannot discriminate in favor of owners or highly compensated employees. The non-taxable portion of tuition reimbursement is limited to $5,250 per employee per year and can be used only toward tuition, fees and similar expenses, books, supplies and equipment. It cannot be used to pay for food, lodging, transportation or other items.

If more than $5,250 of educational assistance is provided to an employee, the excess is generally considered a fringe benefit that is taxable to the employee. However, if the tuition reimbursement can be treated as a working condition fringe benefit, the cost of educational assistance in excess of the $5,250 income exclusion cap may qualify for tax-free treatment. A working condition fringe benefit is assistance that an employer gives to employees expressly for the purpose of making them better able to do their jobs. In other words, a working condition fringe benefit is a benefit that, had the employees paid for it themselves, could be deducted as an employee business expense.

To learn more about the tax benefits of an Educational Assistance Program and how to implement one at your company, consult your tax adviser.