Looking for ways to attract and retain talented employees? Consider adopting an educational assistance program (EAP) for your business!
Under an EAP, employers can provide educational assistance to their employees, and qualified payments made towards the program, up to $5,250 per employee per year, can be excluded from wages. In general, qualifying expenses that can be paid for under an EAP include tuition, fees, supplies, and textbooks. Expenses not eligible for coverage under an EAP would be meals, transportation, and lodging. Employees are responsible for providing proof that any payments received under an EAP were used toward qualifying education expenses. Additionally, under the Consolidated Appropriations Act of 2020, educational assistance has been temporarily expanded to include payments toward the principal and interest of qualified student loans incurred and paid by an employee through December 31, 2025. Student loan payments made through an EAP can either be paid to the employee or directly to the lender and the same $5,250 wage exclusion applies. Any employee who receives EAP payments in excess of $5,250 must have the excess payments reported as wages.
If choosing to adopt an Educational Assistance program for your company, please note that there are certain requirements that must be met. In general, an EAP must:
- Not favor highly compensated employees. Typically, a highly compensated employee is classified as such if either of the following are met:
- A 5% owner at any time during the current year or the preceding year
- The employee received compensation in excess of $135,000 for the preceding year (unless not in the top 20% of employees when ranked by pay)
- Not pay more than 5% of the EAP’s benefits to employees (or their spouses or dependents) who own more than 5% of the company’s stock or who have more than a 5% capital or profits interest at any time during the year.
- Restrict employees from choosing between cash or other taxable fringe benefits that must be included in income.
- Provide reasonable notice about the program to eligible employees
Please note that the rules surrounding educational assistance programs are complex and rules and limitations beyond those previously mentioned may apply. You may wish to consult your tax adviser before setting up an EAP for your business.
Justin Cowan, EA, Tax Supervisor at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.