Taxes and Employee Education

Issue: One of your employees wants to pursue an MBA in marketing under your company’s educational expense reimbursement plan. He is not currently employed in your company’s marketing department, but he would like to be one day and he believes that this education could help him achieve that transfer. Can he be fully or partially reimbursed for all of his educational expenses on a tax-free basis?

Answer: Yes, if the overall skills the employee will learn from the MBA program will enable him to better perform his current job. Educational expense reimbursement plans enable an employer to fully or partially reimburse employees on a tax-free basis for job-related education or training expenses. Those expenses include but are not limited to tuition, fees, books, supplies and equipment. Educational assistance does not include the cost of meals, lodging or transportation incurred by an employee in the course of obtaining such instruction.

Accountable plan requirements.
Reimbursements must be made under an accountable plan in order to be excluded from wages for employment tax purposes. Under an accountable plan:

1. The reimbursed education expenses must be job related;


2. The employee must adequately account to you for the expenses; and


3. Any excess reimbursement or allowance must be returned to you within a reasonable time.

As a caution, remember that a reimbursement, or any portion of a reimbursement, that does not meet all three of the accountable plan requirements stipulated above may not be excluded from an employees’ income.

Job-related requirements.
IRS regulations provide tests to determine whether educational assistance is job-related. To be job-related, the education courses must:

• maintain or improve skills required by the employer; or

• be needed to meet express requirements of an employer or of a law or regulation to retain the employee’s salary, status or employment.

Educational assistance does not qualify as job-related if the courses:

• are needed to meet the minimum requirements of a job;

• will lead to qualifying the employee for a new trade or business; or

• are to fulfill general aspirations for personal reasons of the employee.

Any courses that the employer determines to be nontaxable need not be reported on the employee’s Form W-2.

Cite: Internal Revenue Code Sec 132.

Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health-care and small-business professionals. CCH offers human resource management, payroll, employment, benefits, and worker-safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.