Employer educational assistance, also known as an “educational assistance program,” is a type of benefit in which an employer pays for an employee's education-related expenses (like tuition or related fees, books, supplies, and equipment), or provides student loan repayment assistance. If a program meets certain conditions, then some (or all) of the amount paid to (or on behalf of) employees may be considered tax-free income for the employee and a tax-deductible expense for the business.
Some educational assistance programs may also include scholarships or tuition assistance for employees’ legal partners and dependents, however these are typically not tax-free.
In this post, we’ll focus primarily on the tax-free benefit programs–the ones that follow the rules set forth under Section 127 of the Internal Revenue Code.
There are two broad types of educational assistance benefits that fall under Section 127:
Tuition Assistance, sometimes also called “Tuition Reimbursement” or a “Continued Education Benefit,” is an employee benefit under which a company will cover part or all of an employee’s qualified educational expenses. The only difference between assistance and reimbursement is who covers the cost first; with assistance, a company will pay for the educational expenses upfront and with reimbursement, the employee will pay for the educational expense and be reimbursed by the company at a later point in time.
Tax-free since 1978, tuition assistance is a well-established benefit that has been widely embraced by businesses across the country. Today, roughly 47% of all employers and 80% of medium and large size businesses currently offer some form of tuition reimbursement. Among the list of those already offering this benefit are some prominent Fortune 500 companies like Amazon, Deloitte, Apple, and Disney.
Surprisingly, despite the high adoption rate among medium and large sized businesses, only ~10% of employees at these companies offering tuition assistance will actually use the benefit annually, according to an estimate by Willis Towers Watson.
While tuition assistance is generally used to cover post-secondary education, not all tuition assistance goes towards undergraduate or graduate degrees. In 2018, EdAssist surveyed 22,000 employees and found that 22% were able to take advantage of their company’s Tuition Assistance programs to pursue non-degree educational opportunities–certifications, workshops, individual courses, and nano-degrees geared towards developing more specialized skill sets.
Though benefit amounts can vary wildly, in 2010, SHRM and the NAACP estimated that the average total benefit amount employees received was $2,700 ($3,701 for graduate students and $1,849 for undergraduate students).
Today, the average amount of tuition assistance offered by companies for post-secondary degrees is $5,250 for undergraduate and $10,500 for graduate education (on average, that’s a little more than $1,300 per year for a 4 year degree and $5,250 for a 2 year masters).
Student loan repayment (SLR) benefits are the newest tax-free benefit to be added under Section 127. Under a student loan repayments benefit, a company may make payments or additional contributions directly to an eligible employee’s student loan account(s).
Though relatively nascent, so far student loan repayments have been adopted by 8% of companies, with an additional 36% of mid to large-sized employers planning to adopt SLR benefits in 2022-2023. Some notable companies leading the way include Google and PWC.
While the data is still emerging, employer student loan repayments are a popular benefit among Gen-Z and Millennial job seekers. According to a 2019 survey by the AICPA, 41% of job seekers who had graduated in the past 24 months or would graduate in the next 12 months, ranked student loan repayments among their top 3 most desirable benefits.
Is that surprising, considering each year, more than half of the graduating class enters the workforce with an average of nearly $30,000 in student loan debt and 67% of student loan borrowers are under 40?
We estimate there’s a high utilization rate among those who are eligible to receive student loan repayments benefits, especially considering what a psychological and financial burden this type of debt can be.
Given that nearly ⅓ of the workforce holds some amount of student debt, that level of utilization is likely to be ~30% of a company’s total employee population.
While tuition assistance and tuition reimbursement benefits focus on employee development, student loan repayments benefits are designed to help employees improve their financial wellness by alleviating an existing heavy financial burden.
Companies can use tuition reimbursement benefits to reimburse employees for their student loan payments, but the administrative burden of verifying the expense can be incredibly tedious. New platforms, like Highway Benefits, make it easy for companies and benefits administrators to ensure that company contributions are paid directly to an employee’s student loan.
At Highway Benefits (and across the industry), we’ve seen two trends in contribution structures. On one side are employers who offer a flat contribution per month, usually $100 or $437.50 (to maximize the benefit); on the other are companies who will offer tiered contributions based on employee tenure.
Employers have the flexibility to contribute up to $437.50 per employee per month ($5,250 per year) tax-free, but even as little as $50 per employee per month ($600 per year) could make a significant dent in an employee’s student loans.
If you’re considering implementing an educational assistance program, you may be wondering which benefit is the right one for your company. That’s actually a false choice because, technically, you are not restricted to offering just one of these great tax-free benefits under Section 127.
Under their written educational assistance plans, companies can offer one or both of these benefits tax-free, so long as the written plan satisfies the IRS’ eligibility criteria and the total amount received by an employee, across all the benefits that qualify as “educational assistance,” does NOT exceed $5,250 per employee per year.
Companies are not restricted to offering just one of these great tax-free educational assistance benefits under Section 127. Under their written educational assistance plans, companies can offer one or both of these benefits tax-free…
For example:
Company X can offer $5,250 per employee year in educational assistance and choose to cover tuition reimbursement and/or loan repayments. If an employee with $10,000 in student loans decides to take a $2,000 certificate course and wants to get reimbursed for some of the tuition, he or she could receive $2,000 in reimbursement and $3,250 in student loan contributions and it would still count as tax-free income.
If Company X wants to offer more than $5,250 per employee per year in educational assistance, they absolutely can but only the first $5,250 would count as tax-free income. Any additional reimbursements or contributions would be treated as income for the employee and subject to all the standard payroll and income tax.
With one written 127 plan, a company can offer multiple flavors of tax-free educational assistance benefits to their employees.
Both educational assistance benefits can have significant impacts on recruiting and retention and are highly valuable to employees–tuition assistance and reimbursement programs promote employees’ future education and development, while employer student loan repayments have a significant impact on employees’ current financial needs and well-being.
Whether a company should adopt tuition assistance or employer student loan repayments (or both!) ultimately depends on the company’s goals, people strategy, and employee demographics.
Highway can help you figure out whether tuition assistance, SLR, or both is the best approach to help you reach your talent goals. Speak with a member of our team today!
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 the IRS Tax Code, we recommend you speak to a specialized attorney.
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