Some employers offer tuition assistance as an employee benefit. Employees who receive employer-paid tuition assistance can exclude up to $5,250 of the benefit from federal income taxes each year, as long as certain qualifications are met. Tax-free education assistance is intended for the employee only and not their spouse or dependents.
Eligible expenses for tax-free tuition assistance
Tax-free employer tuition assistance must be used toward an employee’s education. This includes undergraduate and graduate courses, and continuing education. Eligible courses are not required to be part of a degree or certificate program, and students do not have to be enrolled full-time. The CARES Act of 2020 also expanded the tax-free treatment to include employer payment toward employee student debt.
Employer tuition assistance programs vary. Some employers only offer tuition assistance for courses taken in specific fields, and many require the employee to earn As or Bs to qualify for reimbursement. An employee may be required to pay back tuition assistance if they resign from the firm within a certain time period.
Eligible expenses include:
- Tuition and fees
- Supplies and equipment
- Student loan repayment
Eligible expenses do not include costs of:
- Sports, games or hobbies, unless they are required for a degree program or have a reasonable relationship to the employer’s business
- Computers, tools or other supplies that the employee can keep after the course is over
- Education costs for an employee’s spouse or dependents
Working condition fringe benefit
Employees who receive more than $5,250 in one year for education assistance generally must include the excess amount in their taxable income. However, the excess amount is tax-free if it represents a working condition fringe benefit.
A working condition fringe benefit is an expense that would be deductible as an employee business expense if the employee had paid for it. This includes education to improve employee’s current job skills and continuing education courses.
Coordination with other tax-free education benefits
The qualified expenses used to justify tax-free employer education assistance may not be used to justify other federal education tax benefits, such as the American Opportunity Tax Credit or Lifetime Learning Credit.
There is also no-double dipping with 529 plan tax benefits. Taxpayers who receive tax-free tuition assistance may take a non-qualified 529 plan withdrawal in the same year, so long as they first subtract the amount of the benefit from their total qualified 529 plan expenses.
For example, an employee with $25,000 in tuition and textbook expenses who receives the maximum amount of tax-free employer-paid tuition assistance may withdraw $19,750 tax-free from a 529 plan.
$25,000 – $5,250 (employer tuition assistance) = $19,750 tax-free 529 plan distribution
Does employer-paid tuition assistance affect financial aid?
Employer-paid tuition assistance is considered a form of financial aid by colleges and must be reported on the Free Application for Federal Student Aid (FAFSA). The amount of tuition assistance received is added to the student’s Student Aid Index (SAI) and reduces the amount of need-based financial aid the student is eligible to receive. Employer-paid educational assistance is not, however, reported on the Free Application for Federal Student Aid (FAFSA).
Employer assistance with student loan repayment
Some employee benefits packages include help with paying down student loan debt. The CARES Act of 2020 expanded the tax exclusion of up to $5,250 per year in tuition assistance to include payments of qualified education loans. This provision is set to expire on December 31, 2025 unless Congress chooses to extend it.
Other educational assistance provided by employers
A growing number of employers offer help with college planning for employees, their children and their grandchildren. College planning employee benefits include 529 plan selection, payroll deduction for 529 plan contributions and matching contributions. Matching contributions from an employer are considered taxable income, but some companies help cover the costs of these taxes.