Tutorial on Tuition Reimbursement Helping to offset educational costs can motivate hard-working employees and pay dividends for your business.
By Janice Schonwetter
It used to be more common that people would complete their education and join the workforce, never to look back. Today, that’s “old school.” Advanced degrees are becoming increasingly common and important for career advancement. No matter what educational program or level your employees are pursuing, a tuition reimbursement program can be a benefit for them and your company. Tuition reimbursement programs, also called education assistance, can motivate and reward ambitious and hard-working employees. They also can be used as a recruitment and retention tool. Employees concerned about the expense of education seek out employers willing to help. Tuition Reimbursement “Rules” Employers offering tuition reimbursement programs should note related federal regulations under Title 26 Section 127 of the Internal Revenue Code. These regulations require a formal written plan with reasonable notice of availability to eligible participants. Plans cannot discriminate in favor of highly compensated employees. Tuition reimbursement plans can be offered to current active employees, inactive employees on approved leave, retirees, disabled and laid-off employees. Section 127 prohibits employers from giving more than 5 percent total annual education assistance dollars to individuals owning more than 5 percent of the company stock. The code also prohibits giving cash in lieu of reimbursement benefit. Tuition, fees, books, supplies and equipment are reimbursable. Meals, lodging and transportation, as well as any payments related to courses involving sports, hobbies or games are not. Allowable reimbursements are covered regardless of the relationship to the employee’s current job responsibilities or course inclusion in a degree program. Employers offering tuition reimbursement must file a 5500 form annually to report their expenditures.
Benefits to Employees and Employers Tuition reimbursement offers an incentive and the opportunity for employees to expand knowledge and skills associated with current job responsibilities, or in preparation for future opportunities. Dollars reimbursed (up to $5,250 per calendar year) are considered non-taxable income. Employers benefit from increased skill, knowledge and productivity of a more educated workforce. And, tuition reimbursement programs can improve morale and be used to attract and retain employees. Considerations in Establishing a Tuition Reimbursement Program Employers have a great deal of flexibility in structuring reimbursement programs, as long as the basic IRS criteria are met. Consider the following when establishing a tuition reimbursement program:
• What type programs will be reimbursed? IRS guidelines state that education expenses related or unrelated to current job responsibilities are reimbursable. Employers can develop a policy for reimbursement of only those expenses related directly to current job responsibilities. Some companies broaden policies to include reimbursement for expenses related to future job responsibilities in the same career track. Still other companies leave the policy open to all reimbursements allowed under Section 127.
• Which providers will be allowed? IRS code allows expense reimbursement for programs not culminating in degrees. Employers, however, can structure their policy to specify degree programs. Some companies reimburse for undergraduate or graduate degrees only. Others allow reimbursement for certificate programs and post-graduate work. Some companies restrict reimbursement to expenses from community and state colleges, while others include private colleges and universities.
• What percentage of expenses will be reimbursed? The IRS maximum non-taxable reimbursement per year per employee is $5,250. If companies choose to reimburse an employee more than that, they must inform the employee that the overage is considered taxable income. Few employers choose this approach. Employers are not required to offer the maximum allowable amount and can set the reimbursable amount as desired. Some employers use a graduated reimbursement scale based on the employee’s academic grade. For example, an A equals 100 percent reimbursement, B equals 80 percent and C or lower equals 0 percent.
• Will expenses other than tuition be reimbursed? Employers can set policy to cover only tuition dollars. Some employers also reimburse expenses for books, lab fees and other expenses allowable under the IRS code. Employers might also choose to pay for time off if classes occur during normal working hours.
• Who will be eligible for tuition reimbursement? Most employers make these programs available to all employees. IRS code simply states that these programs cannot favor those considered to be “highly compensated.” An employer can target a group—for example, engineers—as long as those employees are not in the highly compensated category. • What will be the method of reimbursement? Employers can add reimbursement funds as a non-taxable addition to a normal paycheck or can cut a separate check. Regardless of method of reimbursement, procedures should be implemented ensuring accurate documentation supported by proof of attendance, grade of record and expenses reimbursed. • Will tuition reimbursement be used as a retention tool? Tuition reimbursement can be structured as a retention tool. Some employees will take their newfound knowledge and skills right out the door as soon as they have finished their education. If so, employers lose the return on investment opportunity. Avoid this dilemma by structuring tuition reimbursement policies requiring payback if the employee leaves within a specified time after reimbursement.
Janice Schonwetter is president of HR by Design, which partners with small and medium-sized businesses, non-profit organizations and government agencies to resolve people and organization related problems. She can be reached at
or (913) 484-5954.
