Excludable Employer Benefit
An employee includes the value of educational benefits provided by an employer in income unless the benefit qualifies as an excludable employer benefit. To qualify as an excludable employer benefit, the benefit must be:
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A working condition fringe,
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Paid for by the employer under an accountable plan, or
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Provided under an educational assistance program of the employer.
Working Condition Fringe Benefits
Any employer-provided expense that an employer pays for an employee is excludable from the employee’s income as a working condition fringe benefit if, had the employee paid for the benefit, the amount paid could have qualified as a deductible employee business expense (even if no deduction could be claimed because of the TCJA suspension of Tier 2 miscellaneous itemized deductions).
Reimbursed Education Expenses
If an employer pays for an employee’s education expenses, the payment is considered a payment under a reimbursement arrangement.
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If the payment is made under a “nonaccountable plan,” the reimbursed amount is included in the employee’s income.
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However, a payment under an employer’s accountable plan is excludable from the employee’s income., An accountable plan is one where the employee documents the expense to the employer., In addition, the expense reimbursed must be deductible by the employee if he/she had paid for it were it not for the TCJA suspension of Tier 2 deductions., Any excess reimbursement over the expense amount must be returned to the employer.
Employer-Provided Educational Assistance Programs
An employee doesn’t have to include in income amounts paid by the employer for educational assistance under a qualified educational assistance program. The maximum amount of educational assistance that can be excluded is $5,250 for any calendar year.
NOTE: Even if an educational benefit is not excludable under an assistance program, it may be excludable as a working condition fringe benefit. No American Opportunity or Lifetime Learning credit, or any other education-related tax benefits, may be claimed for amounts excludable under an educational assistance program.
What expenses qualify for the educational assistance exclusion? Excludable assistance under a qualified plan includes:
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The employer’s payment of education expenses of an employee, including, among others, tuition, fees, books, supplies, and equipment;
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Employer-provided courses for the employee, including books, supplies, and equipment; and
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Employer payments made after March 27, 2020 and before January 1, 2026 for the payment of principal or interest on any qualified education loan incurred by the employee for education of the employee, whether paid to the employee or to a lender. For this purpose, education loan is defined the same as for the Sec 221 above-the-line student loan interest deduction. (IRC Sec 127(c)(1)(B))
Educational assistance doesn’t include tools or supplies (other than textbooks) that the employee may keep after the course of instruction ends. Nor does it include meals, lodging or transportation.
Meaning of Education
For the purpose of educational assistance, education is any training that improves an individual’s capabilities, whether or not job-related or part of a degree program. Education may be furnished directly by the employer or through a third party (e.g., an educational institution). Education involving sports, games, or hobbies doesn’t qualify for the exclusion, unless it is related to the business of the employer or is required for a degree program.
Other Requirements
Be sure to remember the following points:
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Retirees or laid-off employees are eligible for the exclusion,
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Self-employed individuals and partners who have qualified plans in place also qualify, and
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Educational assistance plans may not discriminate in favor of highly-compensated workers.
Principal Shareholders or Owners
Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer. (Sec 127(b)(3))
California Differences
California conforms to Federal law EXCEPT for including as an eligible expense the employer’s payment of student loan payments allowed under the CARES Act as amended by the Taxpayer Certainty Act and Disaster Tax Relief Act of 2020.
So on the employee’s California return, the employer’s payment of the student’s debt would be taxable income and the employee would be able to deduct the student loan interest as an above-the line deduction, if otherwise eligible.