Designing and Managing Educational Assistance Programs

Overview

This toolkit presents a strategic, practical and legal treatment of developing and managing an organizational educational assistance program.

An educational assistance program is an employee benefit in which an employer pays for an employee’s educational expenses, provides tuition reductions or scholarship grants to an employee’s spouse or dependent children or offers student loan repayment assistance. If certain requirements are satisfied, the amount paid, reimbursed or credited toward tuition by the employer is tax deductible for the employer and not taxable income for the employee, making it a win-win program for both parties.

An organization may also establish an educational assistance program (such as scholarship grants) for strategic reasons that extend beyond benefiting current employees, prospective employees or their family members.

Educational benefit plans require a serious and sustained effort to establish and maintain. Employers should seek expert guidance from attorneys, accountants and consultants as appropriate at every stage of the process.

HR professionals are integral to educational assistance programs because they:

• Advocate the establishment of such programs to achieve strategic objectives.
• Assist in setting up the programs.
• Design and implement effective communication plans.
• Enlist the help of experts in the field as needed.
• Engage in ongoing management of educational assistance programs.
• Monitor program effectiveness.
• Monitor relevant changes in the law and the global employment environment.
• Make recommendations for and implement program improvements.

Background

An educational assistance program can help recruit, develop, engage and retain high-quality employees.

Favorable tax treatment for qualifying educational assistance programs has existed by law since 1978 but has been repeatedly scheduled to sunset and then extended. The American Taxpayer Relief Act of 2012 permanently extended employer-provided educational assistance and allows an employee to exclude from income up to $5,250 per year in educational assistance at the undergraduate and graduate level regardless of whether the education is related to his or her job.

Many employers offer educational assistance programs because they improve recruitment and retention and help maintain an educated and skilled workforce. 

Employers may provide assistance for basic education, such as a high-school equivalency diploma, for undergraduate courses and for graduate-level education. According to SHRM's 2019 Employee Benefits research report, 56 percent of employers offer educational assistance benefits.

Data from Student Loan Hero shows that 54 percent of younger employees prefer a student loan payment assistance program over a 401(k) plan (45 percent of all employees feel the same way). Yet according to SHRM's 2019 Employee Benefits Survey, only 8 percent of companies actually offer a student loan repayment aid program. See Converting PTO Funds to Student Loan Relief Is a Timely Benefit.

Educational assistance for employees makes strategic sense.

Such plans can be used as a tool to recruit employees, develop their talents and forge valuable long-term employees. Educational assistance also enables reduced-tax compensation because qualified educational assistance programs are tax-deductible benefits similar to health insurance plans.

Strategies, policies and procedures for educational assistance vary widely among employers. Some employers reimburse employees only after they have satisfactorily completed a course with a grade of C or above; minimum grade requirements may vary for graduate school and undergraduate programs. Other employers provide advance payment of educational expenses; some provide half of the reimbursement up front and the rest on satisfactory completion of the course.

Some employers link educational assistance to continued employment and require pay back of educational assistance if the employee voluntarily leaves the organization within a specified time period, such as a year. Variations abound; however, employers must be aware that all choices are not equal in terms of tax consequences, administrative costs and perceived value to prospective hires and current employees.

Business Case

Organizations offer educational assistance programs for several strategic reasons:

• Employers can use educational assistance to recruit high-quality employees who may become valuable, long-term employees if their knowledge, skills and abilities (KSAs) are developed and a suitable career path is available. For such persons, ongoing education is crucial.
• Employers can recruit high-quality employees who may require additional education in areas of need for their organizations. For example, a potential hire might be highly proficient in technical fields but lack oral or written communication skills. Such a mismatch of KSAs may have thwarted the applicant's previous employment efforts and the organization's ability to find qualified workers. Employers that promise to pay for a potential hire to round out his or her education or to receive coaching or tutoring to fit the organization's needs can be a powerful recruiting tool.
• Some employers find that they need to supplement a new hire's basic reading, writing or math skills just to bring the employee up to the minimal competency level for the open position.
• Employers often find that even well-educated applicants or employees have critical KSA gaps that are due, in part, to the fast-paced global economy and to the failure of some employers to recognize the importance of continual education and skills development.
• Employers can enhance their competitive abilities by educating and training their existing workforce. This is the realm of development—shaping the KSAs of the organization's workforce to satisfy its current and future needs.
• Closely related to development is the concept of career pathing (also known as career mapping), which is concerned with satisfying the organization's needs and with meeting the employee's needs over his or her entire career. Educational assistance programs can be designed to integrate career-pathing concepts for the mutual benefit of the employer and employee.
  
• Educational assistance programs can help employers retain valued employees. Retaining a current employee is usually more cost-effective than recruiting and training a new employee to perform the same job at the same level of competence. Retention of valued employees should be a high priority for organizations.
• Educational assistance programs can also improve employee engagement, which turns a good employee into an exceptional employee.
• Educational assistance programs can also boost an organization's branding efforts. For example, Intel and Booz Allen Hamilton use educational assistance programs in their branding efforts.
• Implementing student loan repayment benefits can improve employee financial wellness, increase productivity and retention and attract desirable candidates.
  

See:

The Pros and Cons of Employer Plans to Help with College Tuition and Student Loan Debt

In a Tight Talent Market, an Employer's Help with Education Expenses Can Turn a Candidate's Head

The Business Case for Employee Student Loan Repayment Programs

HR's Role

HR's role in designing and managing an educational assistance benefit program is multifaceted. The most basic role an HR professional plays is presenting the business case for an educational assistance program; HR should not assume the CEO is aware of the cost-effectiveness of such programs.

If senior leaders support the idea of offering some form of educational assistance benefit, HR must design a benefits package that is best suited for the organization with input from outside experts. Feedback from senior leaders must be incorporated to adjust the plan as needed. Employers have numerous factors to consider in developing an educational assistance benefit program. 

If an educational benefit program already exists, HR professionals should continuously assess its effectiveness and look for improvements. HR must make sure the program meets the organization's strategic objectives. An employee who has completed an approved course of additional learning will expect career development opportunities in the organization and enhanced marketability outside the organization. The employer should be poised to reap the reward of its investment through career pathing.

Setting Up an Educational Assistance Program

HR professionals have many options when creating an educational assistance program. Interdependent factors the employer must consider in setting up a particular program include the following:

• Who will be eligible to receive the benefit?
• • Will the benefit be available to all employees on a nondiscriminatory basis or only to certain employee classes or levels?
  • Will the benefit be available to inactive employees? See Internal Revenue Service (IRS) Bulletin No. 1996-45 (PDF).
  • Will the benefit be available to employees' spouses and dependents?
  • Will elements of the benefit, such as scholarships, be made available to individuals who are not employees, employees' spouses or dependents?
• Will cash or another benefit be made available in lieu of the educational benefit to employees who do not want or need the educational benefit?
  
• Will student loan repayment be offered?
  
• What tax structure is desired?
• • Is exclusion from income under §127 of the Internal Revenue Code desired?
  • Is deductibility under §135 of the Internal Revenue Code desired?
  • Does the organization desire to obtain tax benefits under §117(d) of the Internal Revenue Code or to establish a tax-exempt charitable foundation to award scholarship grants?
  • Will the benefit be structured as a lifelong learning account (LiLA), which may have no tax advantages at the federal or state level but may allow both the employer and employee to receive substantial benefits in terms of their own needs? See Publication 970, Tax Benefits for Education.
• Will the organization seek a strategic partnership with a particular educational organization?
• Will the organization seek, in effect, a volume discount or other quid pro quo for employees who are steered to a particular educational institution?
• Will the organization approve of certain educational institutions and disapprove of others?
• Must the educational institution have a certain level of accreditation?
• What parameters will be placed on the type of education that is subsidized?
• • Will the program include education to receive a professional certificate?
  • Will the program include education toward high school equivalency?
  • Will the plan include education toward an undergraduate degree?
  • Will it include education toward a graduate degree?
  • Will the benefit cover online learning?
  • Must the education be directly related to the employee's current job responsibilities?
  • Must the employee achieve a certain grade level, such as C or above, to receive reimbursement?
  • Will the organization pay only for courses related to the organization's focus (e.g., business), or will it also cover other courses (e.g., art and science)? How will the organization differentiate between the areas if a distinction is to be drawn?
• How much will the organization pay?
• • One hundred percent regardless of the cost of education?
  • A lower percentage regardless of the cost of education?
  • A fixed amount regardless of the cost of education?
  • A fixed amount only if favorable tax treatment applies?
  • Will there be a cap on the benefit an individual may receive regardless of other considerations, such as length of employment and degree of job relatedness?
• How will the organization handle unexpected circumstances?
• • What if the employee is laid off?
  • What if the employee is terminated for cause?
  • If the employee voluntarily leaves employment during the education or within a certain period of time after completing it, will the organization recapture all or some of its expenditures? If so, how?
  • What if the educational institution ceases to offer the degree sought?
  • What if the employer merges with another organization that does not offer educational assistance benefits?
  • What if the tax laws change?
• When and how will the organization pay?
• • Will the organization advance funds?
  • Will the organization reimburse funds paid by the employee?
  • Will the organization reimburse funds only after the employee has paid them and after the employee has successfully complied with all parameters?
  • Will the organization disburse the funds to the employee or directly to the educational institution?
• How will the organization manage the educational benefit program?
• • Will an outside expert such as an attorney, CPA, benefits consultant or third-party administrator help set up and/or administer the program?
  • What role will in-house staff play in setting up and administering the program, and how much time will be required? Will an additional budget be allocated?
  • How will the organization communicate the availability of the benefit?
  • What will the organization do to ensure compliance with the program's strictures to obtain the expected tax advantages?
  • What will the organization do to ensure that the program delivers the expected competitive advantages in terms of recruiting, development, retention, engagement and so forth—that is, what metrics will be applied?
  • What technology will the organization use to facilitate the program's metrics and other management aspects?

See:

5 Takeaways from Disney's Tuition Benefits

Fine-Tune Tuition Benefits to Meet Talent Goals

Education Benefits Present a Learning Opportunity

Communication

Effective communication of an organization's benefits programs is critical to achieve strategic objectives.¹ Communication should be delivered verbally (such as during orientation and in periodic meetings) and in written form (such as in policies, procedures, forms, websites, audiovisual presentations and social media). Although employees and potential hires may easily understand relative levels of monetary compensation, understanding the advantage of benefits takes more effort on the part of HR professionals, employees and potential hires. Benefits tend to be valued on an individual basis; if an employee does not use the particular benefit, he or she may not see its value. See Better Benefits Communication Pays Off.

The following are keys to effective communication regarding educational assistance programs:

• Communication should move in all directions:
• • Up and down the management chain. Communication should flow up to the C-suite and down to the supervisors.
  • Across the management chain. Managers at the same level in the organizational chart, even if they are not necessarily affected by the particular benefit program, should understand the educational assistance program. This communication keeps the whole hive working toward the same goals and may assist in cross-pollination among diverse corporate divisions.
  • Up and down to nonmanagement workers. Supervisors and nonmanagement employees are key to communicating information about the effectiveness of educational assistance programs and other workplace benefits and initiatives.
  • To and from outside individuals. Information should be shared with job applicants, investors and the public at large.
• Communication should satisfy legal requirements, such as equal employment opportunity (EEO) laws and the Employee Retirement Income Security Act (ERISA).
• Organizations should make information easily available to employees and other interested people through many communication forms, including social media.
• Organizations should highlight the value of this benefit to employees, potential hires and other interested people.
• Organizations should highlight the cost of providing such benefits.

Legal Issues

The legal issues concerning the establishment and maintenance of an educational assistance program are complex. They potentially involve the Internal Revenue Code, ERISA, federal EEO laws and state laws concerning EEO and statutory initiatives, such as lifelong learning accounts (LiLAs). Employers should not attempt to create an educational benefit plan without up-to-date expert advice. Tax laws are in constant flux, so employers need to be up-to-date about any information concerning the application of tax laws before designing and implementing an educational assistance program. This toolkit does not provide legal or tax advice. However, it does discuss some basic issues to help readers in their discussions with competent experts in the field of educational assistance programs.

Section 127 Program

Section 127 of the Internal Revenue Code provides an exclusion of up to $5,250 per calendar year from an employee's gross income for amounts received by the employee, provided that certain requirements are met.

To qualify under §127, a program must:

• Have a written plan document.
• Not provide more than 5 percent of its total annual benefits to individuals who own more than 5 percent of the company's stock.
• Not provide eligible employees with a choice between educational assistance benefits and any other taxable compensation (whether cash or noncash).
• Provide eligible employees with reasonable notification of the availability and terms of the program.
• Benefit employees in an employer-designated classification that does not discriminate in favor of highly compensated employees. An employee is a highly compensated employee, for purposes of §127, if the employee meets either of the following criteria:
• • Owned at least 5 percent of the employer's stock in the preceding or current calendar year.
  • Received compensation from the employer in the preceding year in excess of a specified amount determined annually by the IRS.

If the program meets these criteria, an employer can pay an employee up to $5,250 in educational assistance benefits each year on a nontaxable basis. The exclusion applies whether or not the courses taken are related to the employee's current job responsibilities or are part of a degree program.

See Legislation Extends Student Loan Repayment Benefits for 5 Years.

Section 132 Fringe Benefit Program

Sometimes an employer cannot satisfy, or does not want to satisfy, all of the §127 requirements. For example, an employer may prefer to provide educational assistance benefits only to its highly compensated employees.

Even if an employer does not satisfy the §127 requirements, an employer can still provide nontaxable educational assistance benefits to its employees if those benefits satisfy the requirements for a working condition fringe benefit under 26 U.S.C. §132. See IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.

A working condition fringe benefit under §132 is an employer-provided benefit that the employee can deduct on his or her individual income tax return if the employee paid the amount. Educational expenses are a deductible expense for an employee if the education is directly related to the employee's current job responsibilities.

Education is directly related to an employee's current job responsibilities if it meets both requirements:

• Maintains or improves skills required by the employer, including refresher courses and courses dealing with current developments in the employee's profession.
• Meets the requirements of any applicable law or regulation or any expressed requirements imposed by the employer for bona fide business reasons as a condition to the employee's continued employment, status or rate of compensation.

Courses that enable an employee to meet the minimum educational requirements for qualification in either the employee's current field of employment or a new field of employment are not directly related to the employee's current job responsibilities. Payment or reimbursement for such courses is not nontaxable under §132.

For example, courses taken toward an accounting degree by an accounting clerk are not directly related to the clerk's current job responsibilities because an accounting degree is the minimum educational requirement for an accountant. Similarly, courses taken by an accountant toward a law degree are not directly related to the accountant's current job responsibilities, because a law degree would qualify the accountant for a new field of employment.

A course-by-course analysis applies to nontaxable educational assistance benefits under §132. As a result, any courses that are not related to the employee's current position, but are required to complete a job-related degree, will not qualify for nontaxable reimbursement under §132, even if they are part of a job-related degree program.

For example, suppose an accountant who is taking courses toward a master's degree in accounting is required, under the degree program, to take an accounting course pertaining to an area in which the accountant does not, and will not, practice in his or her current position. Even if the accountant's employer has agreed to pay all of the accountant's educational expenses for the master's degree (because the master's degree will improve the accountant's skills), the employer's payment of expenses for this particular course is taxable compensation because the course is not directly related to the accountant's current job responsibilities.

Unlike §127, there is no annual limit on the amount of educational assistance benefits an employer can provide on a nontaxable basis under §132.

Like a §127 program, educational assistance benefits provided under §132 are not employee welfare benefits for the purposes of ERISA.

Section 117(d) Fringe Benefit Program

Neither §127 nor §132 provides an exclusion from gross income for educational assistance benefits paid to anyone other than the employee. Educational assistance benefits paid by an employer for an employee's spouse or dependents generally must be treated as taxable compensation to the employee. However, certain educational institutions can provide nontaxable qualified tuition reductions to the spouse or dependent children of employees under special rules set forth in 26 U.S.C. §117(d).

Tax-Exempt Section 501(c)(3) Foundation

Employers may be able to provide nontaxable educational assistance benefits to the spouse or dependent children of employees—as well as to individuals unaffiliated with current employees—by establishing a tax-exempt charitable foundation to award scholarship grants under Internal Revenue Code 26 U.S.C. §501(c)(3). See Section 501(c)(3) Organizations.

Lifelong Learning Account

A LiLA is a form of educational benefit emanating from state statutes, especially in Maine. Typically, a LiLA functions like a 401(k) plan in that the employer, the employee or both contribute to an account, and the employer portion of the account becomes vested with the employee at some point. In the states that promote the use of LiLAs, the rules are established by the state. See Changing Lives through Lifelong Learning Accounts.

Metrics and Technology

An organization with a serious commitment to strategic thinking and long-term success will use metrics and technology in a variety of ways. One such way is to measure and analyze the effectiveness of the organization's handling of its educational assistance program.

Jay A. Halfond, former dean of Boston University Metropolitan College and Extended Education, observed that "most employers support the higher education of their employees, and most colleges and universities rely heavily on these tuition dollars. Given this interdependence, it is remarkable how little direct dialogue occurs to ensure that corporate needs are being addressed and that companies are exposed to the full array of what their academic suppliers can provide." That is a criticism of the lack of acumen and diligence in setting up an educational assistance program. Even more disturbing is his next observation: "It is also remarkable how little scrutiny employers apply to how their dollars are spent and what return they receive on their investments." 

The goals of an educational assistance program should follow the SMART paradigm:

• Specific, clear and understandable.
• Measurable, verifiable and results oriented.
• Attainable.
• Relevant to the mission.
• Time bound with a schedule and milestones.

Global Issues

U.S. employers participate in a global economy in which some organizations receive substantially more government financial assistance than has been the tradition in the United States. The U.S. remains the world's largest economy, but it cannot rest on its laurels. It must compete with China, India, the European Union, Japan and South Korea. Each of these regions goes through its economic ups and downs—just as the U.S. does—but these areas are formidable competitors for well-educated employees.

To compete with such well-funded countries, U.S. organizations must be on the cutting edge in terms of attracting, developing and retaining the highest-quality and most efficient employees. Educational assistance programs are one way U.S. organizations can maintain their competitive advantage, due in part to the premier U.S. university-level education system.

Templates and Tools

Samples

Educational Assistance Application  

Educational Assistance Policy

Educational/Tuition Assistance (with specific reference to accountants, engineers, lawyers)

Student Loan Assistance Policy

Agencies and organizations

Internal Revenue Service 

Endnotes

¹Maniaci, S. ( 2005). Communicating employee benefit programs. In J. S. Rosenbloom (Ed.), The handbook of employee benefits (6th ed., pp. 1067-1081). New York, NY: McGraw-Hill; WorldatWork. (2007). The WorldatWork handbook of compensation, benefits and total rewards. Hoboken, NJ: Wiley.