Is your company in a position to ramp up employee benefits? Take a close look at your employee benefits related to education. Education benefits tend to have more focused appeal for certain types of workers – upwardly mobile, education-focused workers that you want to keep.
1.) Workers want education benefits – and respond to them. The 2011 National Association of Colleges and Employers Student Survey, tuition reimbursement programs came in as the third most desired employee benefit – behind only 100 percent employer-paid medical coverage and annual salary increases. But by 2014, job-seekers elevated tuition reimbursement for advanced education to the number two spot – tied with annual salary increases. The only thing that more of them wanted than tuition assistance for higher learning expenses was more than two weeks of paid vacation per year. Education benefits ranked ahead of a company 401(k) match, ahead of employer-paid medical insurance, casual dress codes, dental insurance, bonuses, on-site fitness centers, family-friendly benefits, flextime, telecommuting and on-site day care.
2.) Your competition is offering education benefits. A 2014 report from the Association for Talent Development found that employers spent some $18 billion on education and training for their workers – an average of $1,200 per worker. According to the SHRM 2015 Employee Benefits research report, 56 percent of employers offer undergraduate-level educational assistance benefits, and 52 percent offer graduate-level benefits.Even fast food and quick service restaurants such as McDonald’s, Chipotle and Starbucks have rolled out education benefits for employees – and they’re getting high-quality, upwardly mobile workers as a result.
3.) Advances in technology and online learning make it more cost-efficient than ever to provide specialized, targeted training and education to a large number of people. Your education dollar generates more bang for the buck than it did 10 years ago.
4.) It benefits the employer. According to the 2011 Tuition Assistance Value Study from the ROI Institute, 81 percent of employers reported improved engagement, 80 percent reported improved organizational commitment and 77 percent reported increased career mobility for their employees.
So, what to do?
Upgrade your employee-provided educational assistance, or tuition assistance program. Normally, employers may provide up to $5,250 per year per employee in tuition assistance (under IRC Section 127) without affecting the employee’s taxable income. That is, the first $5,250 is tax exempt to the employee. This benefit must be open to all employees, though. Employers cannot pick and choose who gets to take advantage of this benefit and they cannot restrict the benefit to management level employees. Owners and shareholders cannot use more than 5 percent of the overall benefits available under the plan. And you must also maintain a formal, written plan for your plan to qualify for the Section 127 exemption. Specifically, you need to file a Form 5500 by the last day of the seventh month after the program’s year end.
Suppose you might like to fund a Section 127 plan, but you expect you won’t be able to afford to pay for the benefit if everyone in the company signs up. You need a way to limit the number of people who sign up without discriminating against rank & file employees and endangering the plan. Is there a way to do this?
It turns out there is: While employee benefit eligibility needs to be broad, you can limit benefit eligibility to programs that are closely related to your business. That way, your engineering firm can focus on paying for engineering classes, and you don’t have to fund every little intersectional underwater basketweaver grievance studies program your employees want to sign up for.
Lots of employers stop there. But they may not have to. First of all, there’s no reason you need to cap your benefit at $5,250 per year. This is because if the employee happens to enroll in an academic program that they need for their employment, and as long as the program doesn’t qualify them for a new profession, they can deduct the entire cost of the tuition. That is, it’s tax deductible for the employer as an employee business expense, and it’s tax deductible to the employee under IRC Section 162.
When you talk to your accountants, mention 26 U.S. Code Section 132(d). Essentially, you can offer your employees a tax-free working condition fringe benefit. Traditionally, employers have used this little quirk of the tax code to exempt certain travel and meal expenses, but there’s no reason you can’t fit an education fringe benefit into the plan, if the education maintains or improves job skills or meets licensure or employer requirements to stay on the job or maintain their current rate of compensation.
The pluses: Benefits offered under Section 132(d) don’t require a ton of admin and no ongoing written plan. There’s also no per employee cap on benefits, and you don’t have to offer the benefit to everyone.
Naturally, you can offer tuition benefits under both Section 127 and under Section 132(d) at the same time, and the same employee can potentially qualify for both programs.