Get Paid to Get Smarter

by Roy A. Lewis, E.A. - December 2, 2005

Smarter, better-educated employees are a valuable resource for any company. With the cost of education skyrocketing, many employers are turning to tax-friendly methods to help their employees obtain or further their formal educations.

Education assistance programs:
Businesses can offer their workers up to $5,250 annually in payments for undergraduate and graduate education. Employees don't pay tax on the payments, and the employer can deduct them. It's not as easy as slipping a few extra bucks into a paycheck, of course. Employers must administer such benefits under a formal, written plan. The plan can't discriminate in favor of highly compensated employees, and no more than 5% of the total benefits can be used for shareholders or owners. Finally, notice of the program must be given to all eligible employees.

Scholarships and grants:
This program comes with some restrictions. To ensure that the scholarship or grant is tax-free, the employee must be a degree candidate at a qualified educational institution, and he or she must use the funds for tuition, fees, books, supplies, and education equipment. In order to stay tax-free for the employee, the scholarship or grant can't represent payment for past, present, or future employment services. It must be awarded on an objective and non-discriminatory basis.

Working condition fringe benefit:
This is one of the simplest ways to offer employee education programs. There's no requirement for a written plan, nor does the employer have to notify employees about the benefit. There are no discrimination rules and no dollar limits. Additionally, the definition of "education" is much broader under this plan; it can include meals, lodging, and transportation. But unlike the other two plans, the education received under this plan must be closely linked to the employee's current job.

Plans like these can benefit employers and employees alike. If you're an employer, though, you really shouldn't begin any of these programs without the guidance of a skilled tax professional. If you're an employee, make sure to meet with your benefits folks to learn whether you can take advantage of any educational offerings. It might just be a smart move.