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HR and benefits professionals know that there’s so much more to managing an employee benefits package than just selecting the right mix of benefits–deciding which benefits to offer just the start.
One extremely important, but admittedly tedious, part of benefits management is compliance. Not only do benefits teams need to continually handle all the paperwork related to benefits, they also need to stay on top of continuously updating requirements.
To help simplify things, let’s break down what compliance means and why it matters when it comes to your educational assistance benefits. Read on to learn more.
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In general, “benefits compliance” is the process of making sure that employer-sponsored benefit programs meet any necessary regulations, requirements, or standards set forth by federal and/or state laws, and/or regulating authorities (such as the IRS).
As with many other benefit programs, compliance with federal and state laws is important for an educational assistance because it helps companies:
For educational assistance benefits, compliance with IRS guidelines is also essential in order for a program to remain exempt from federal income and payroll taxes.
Luckily for employers, at a federal level, the compliance requirements for an educational assistance benefit are currently a lot less complex than the requirements for other employee benefits, like 401(K)s or health plans.
Per the IRS guidelines, companies offering an educational assistance benefit are required to:
While some states may defer to the federal standards for compliance, not all do so companies should always confirm their specific situation with a specialized attorney or tax expert.
Even though educational assistance benefits are not currently formally subject to the Employee Retirement Income Security Act (ERISA), plan sponsors should still ensure that their 127 plans do not favor Highly-Compensated Employees (HCEs) and that owners are not receiving the bulk of the benefit.
Typically, nondiscrimination tests for the different benefit programs evaluate whether a given benefit program discriminates in favor of HCEs on the basis of three things: eligibility criteria, the benefits offering, and utilization.
Of course, these testing requirements will vary depending on the benefit in question.
Under Section 127, educational assistance plans can still pass non-discrimination testing even if the utilization rates for any offered educational assistance varies (or the company requires particular course grades to receive a certain amount of assistance).
The exception to this would be an Owner Concentration Test, which benefit plan administrators should use to ensure that any owners participating in the educational assistance benefit do not receive more than 5% of the educational assistance paid out to all employees in a given year. For educational assistance benefits, this test is a straightforward formula:
Total Annual Owners Benefits <= .05*(Total Annual Benefit Paid Out)
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Where other benefits, such as Cafeteria Plans, Dependent Care Assistance Programs, and Health FSAs, use “Eligibility Tests,” “Average Benefits Tests”, and “Contributions and Benefits Tests” to test eligibility and utilization, educational assistance plan sponsors may be interested in using similar methods (when applicable).
Educational assistance plan sponsors will want to ensure that the ratio of non-HCEs to HCEs who are eligible to participate in their educational assistance benefit satisfactorily meets nondiscrimination testing requirements and that HCEs are not receiving better benefits than non-HCEs.
Under IRC Section 6039D, employers maintaining specified fringe benefits, including educational assistance benefits under Section 127, technically are supposed to maintain records for each year that show:
To certify this information, employers used to have to file a Form 5500 - Schedule F with the IRS, however in 2002, the IRS suspended this requirement (Notice 2002-24).
At present, companies offering an educational assistance benefit do not need to file their written plan document or the 6039D plan information with the IRS but they may still want to keep both on hand for their own records.
If a company’s section 127 educational assistance benefit program is out of compliance, employers may find themselves facing a range of possibilities.
In some situations, employers and employees may still be able to exclude the educational assistance from gross income under other sections of the tax code (assuming the assistance satisfies the requirements of those other sections–section 117, section 162 or section 212 of the Internal Revenue code.
In other situations, employers may potentially face a variety of consequences, some of which may include: investigation by the IRS or other agencies, various penalties and/or fees, and potentially owing back taxes.
As the consequences may be uncertain, it’s best to avoid the headache entirely and make sure your educational assistance benefit plan remains compliant from the start.
Keeping up with compliance can feel incredibly daunting, but Highway Benefits is here to help. When you offer an educational assistance benefit through Highway, we help with every step of the process to take all the hassle out of offering a new benefit to your employees.
Our expert team will help you design and administer a benefit plan that's compliant from the start while still meeting your company and talent goals. Schedule a demo with our team today to learn more.
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Disclaimer: This article is purely information and is not intended as financial or legal advice. For more in-depth questions on how to interpret US laws or tax codes, we recommend you speak to a specialized attorney.
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