November 13, 2012
The Future of the Popular Employee Education Expense Reimbursement Benefit is Unclear…
Since its inception in 1978, many employers have taken advantage of the $5,250 tax free Education Assistance Benefit available under Section 127 of the Internal Revenue Code. This benefit allows employees to receive up to a $5, 250 reimbursements from their employer to continue their higher education courses at the associate, undergraduate and graduate level.
This tax credit is set to expire on December 31, 2012 unless Congress once again extends it. The bet is that this will be extended since the focus of the current Administration is on education of the workforce along with the fact that this tax credit has been extended ten times in the past. However, the current political climate and the looming fiscal debt could threaten this popular tax free employer benefit.
What Should Employers Do?
Examine Your Education Reimbursement Plan: An employer should begin looking at what it is willing to do should the reimbursement become taxable. Will you continue to provide the benefit? If so, will you simply add the reimbursed amount into taxable income for the employee or ‘adjust up’ the employee’s wages to cover the new taxable portion?
Communicate to Employees: Once you’ve decided what you will do, then this information should be communicated to the employee. While you could wait until after December 31, 2012 to communicate the issue to your employees, it may be better to at least make them aware that the possibility of the benefit becoming taxable exists so they can plan. The communication should be short and explain clearly that the outcome is uncertain. It should also include an outline of how the expiration of Section 127 will impact the current employee benefit should the tax credit not be extended. It has been our experience that alerting employees to possible changes before they happen, even if they don’t transpire, lets the employees know you are looking out for them.