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Tax Benefits for Tuition Reimbursement

There are many employers that use tuition reimbursement plans to help attract and retain employees. Even if you own a small business you may want to consider using this tax tool. It can benefit not only you and your employees, but can also allow you to deduct a portion of your own child’s tuition cost, as long as your child is employed within your business. The tuition reimbursement plan can cover undergraduate, graduate, and professional study.

First we will look at how this can benefit your general employees, and secondly look at your employed family members.

General Employees

Thanks to the Fiscal Cliff deal a few years ago employee-provided tuition reimbursement plans allow up to $5,250 per year. The Fiscal Cliff refers to a combination of expiring tax cuts combined with cuts in government spending that was set to take effect December 31, 2012. Worried about a potential recession the federal government did not allow these events to take place as planned. Any size of business is allowed to make use of this benefit. There are no restrictions. Most businesses will use this as an incentive to retain employees and it has been proven to work very well. The Section 127 provision of the tax code that provides this benefit was set to expire in 2012, however the Fiscal Cliff deal was passed that now makes it permanently available. The tuition paid by the employer is tax exempt. It is also important to note that it is required by the business to notify all employees that they are eligible. That simply means employers are not allowed to restrict access to the plan by certain employees.

Employed Family Members

There is a good opportunity for some businesses (particularly small businesses) to take advantage of this program for family members that are employed by the business. There are certain requirements for this to happen:

1) The child, grandchild, or other family member must be 21 years of age or higher. This program can be a great benefit for children in college as they finish up an undergraduate degree, as often this will cover the junior and senior years of college.

2) The family member must be financially independent. In other words, they cannot be claimed on their parent’s tax return, and are providing over half of their own support.

What is the main benefit for the employer?

This tax credit help employers invest in employee, thus retain talented employees. Many employers will direct the benefits at entry-level employees to offer an incentive for long-term retention. SHRAM estimates 56% of all firms offer tuition assistance and most saw a 20-40% increase in retention.

The net savings, the employer will save on FICA, unemployment taxes, as well as workman compensation expenses.

What is the main benefit for the employee?

Your employees receive a tax-exempt benefit. This means that they do not have Federal, State, or FICA taxes taken on the benefit. Those employees that used tuition assistance realized a 43% increase in wages after 5 years.

The Bureau of Labor Statistics conducted a study that evaluated the retention of employees over a 15-year period. The average length of time employees who fit in the 16-24 years of age group averaged 10.57 months of service to the same employer. However, many of the companies with the tuition reimbursement plan in place are reporting retention of that same group of employees at 5 years or more. As a business owner it speaks volumes of the performance value of this program, and how it can help your employees, and ultimately, help your bottom line.

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