Employer education assistance

How it works

Under section 127 of the tax code, an employer with a written plan can pay up to this year's official employer education assistance limit (not yet verified here; see the official source below) a year per worker for tuition, fees, books, and supplies, and the amount does not appear in the worker's taxable wages or on the W2 as income. The courses do not have to relate to the job. The same cap also covers payments the employer makes toward the worker's student loan principal and interest, under a rule that Congress has extended and the IRS describes on its page. Amounts above the cap are taxable wages unless they qualify as a working condition fringe benefit because the course relates to the current job. Expenses paid by the employer and excluded from income cannot also be used for an education credit. The plan must not favor highly paid workers.

What it gives

Money spent on schooling by an employer under the plan is not taxed as pay to the worker.

Student loan payments by the employer count under the same cap.

The courses need not be related to the current job.

What it costs, or where the catch is

The cap is per year, and a full tuition bill above it is taxable above the line.

The employer sets the plan terms, and many require a passing grade or a stay of a year or more.

Expenses the employer paid cannot be counted again for the education credits.

A worked example

Tess works at a hospital with a tuition program and takes $4,000 of classes toward a nursing degree. The employer pays the school directly, and the $4,000 never shows up in her taxable wages. At her 22 percent bracket, that is $880 of tax she does not pay, since $4,000 times 0.22 is $880. The next year the employer also sends $1,200 toward her student loan under the same plan, still inside the cap.

Where it goes wrong

The common miss is a worker who pays tuition out of pocket and claims a credit without knowing the employer plan would have covered it tax free.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 970, Tax Benefits for Education. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.