Opportunity for Nonprofit Employers to Provide Educational Benefits

• August 17, 2023
• Laura Kenney

Student debt relief has been a hot topic in the news recently. The CARES Act gave employers—including nonprofit, healthcare, and educational institutions—the opportunity to provide tax-free student loan repayments to employees! Under a written employee educational assistance plan, employers can provide employees with up to $5,250 tax-free educational benefits that can be used to repay student debt. The payments can be made either directly to the employee or to a lender for principal and/or interest on qualified educational loans. Educational assistance plans are not new. However, the provision to use up to $5,250 toward student debt repayment is relatively new. It was enacted in March 2020 and expires December 31, 2025. It is possible Congress will extend the provision beyond 2025, but it’s too early to tell.

So, for now the opportunity is temporary, but there’s still time to provide employees with tax-free student loan repayments through the end of 2025.

An education assistance plan must be a written plan. The education does not have to be related to the job. But the plan is only for employees, not their family members, and can’t discriminate in favor of highly compensated employees. Employees cannot be provided a choice to take the educational benefit or cash. And the employer must provide reasonable notification of the plan’s availability and terms to its employees. Amounts paid in excess of the $5,250 are taxable.

Interestingly, a bipartisan group of U.S. Senators recently sent a letter asking the IRS to publicize and educate employers on this unique (but temporary) employee educational assistance plan provision. 

There are also other ways employers can give educational benefits to their workforces. The fringe benefit tax rules allow employers to provide tax-free educational expenditures to or on behalf of employees if the education is related to the specific employee’s job. While there is no dollar limit on these benefits and the organization can target the training for specific employees, there are certain restrictions on the type of education that qualifies for the benefit. For this type of educational benefit to be tax free, it must either:

• maintain or improve skills required by the individual in his or her position;

 or

• meet the express requirements of the employer or of applicable laws or regulations as a condition to the employee retaining the position or compensation.

The education expenses cannot enable the employee to meet the minimum requirements to qualify for the position and cannot qualify the employee for a new position or business.

Educational institutions have an additional special avenue for providing tax-free educational benefits to employees. Under the qualified tuition reduction rules, a tax-exempt school can provide any amount of free tuition to its employees, as well as to their spouses and dependent children. The tuition needs to be below the graduate level and the employer must offer this benefit in a nondiscriminatory manner so as not to favor highly compensated employees.

If your nonprofit, healthcare, or educational institution wants to strategically reward or develop a particular employee, you can provide educational benefits on a taxable basis, too. A tax-exempt organization would need to be especially mindful of the reasonable compensation requirements for the overall compensation package, particularly for an executive-level employee. However, offering these benefits is another way to supplement new hire offers and encourage retention among current employees, particularly those in leadership positions. To mitigate the tax effect on the employee, the organization can also provide a tax gross-up, but again, must be mindful to avoid any excess benefits and excess compensation.

Many employees, and potential employees, are eager for opportunities for professional and personal development. Employers investing in educational assistance for employees may benefit by attracting, developing and retaining a more engaged, professionally advancing workforce – and employees appreciate these benefits.

CLA’s nonprofit talent solutions and tax team can help you with understanding the tax rules and determining what educational assistance program would work best for you.

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