A tuition reimbursement program can be a very attractive employee recruitment and retention tool, while simultaneously providing employers with the benefit of a more educated workforce.  Launching a tuition reimbursement program sends employees the message that you value them and their growth enough to invest in their futures.

Such programs can be tax-favored as well.  If you design your program to meet the Internal Revenue Service’s requirements for an “educational assistance program,” the first $5,250 of tuition assistance is excluded from wages for federal tax purposes.

Here are some factors to consider when designing your company’s program:

  • Who should be eligible for the program?  Part-timers or only full-timers?  New employees or only those who have been employed for a certain period?  Certain classifications of employees but not others?  The answers to these questions are within the employer’s discretion, although to receive favored tax treatment, the program must comply with ERISA’s nondiscrimination rules, meaning that highly compensated employees must not be favored over other employees.  In most instances, it should not be difficult to construct eligibility requirements to allow for tax benefits.  Many employers choose to limit eligibility to full-time employees with some tenure of service (such as a year) to ensure that the employee has proven himself or herself to be a valuable employee before undertaking tuition payments.  It may be appropriate to make employees with recent disciplinary issues ineligible for the benefit.
  • What kind of coursework can be reimbursed?  Does it need to relate to the business at all?  How closely must it relate to the employee’s job?  Can an employee take coursework related to other jobs within the company (sometimes done with the hopes of transferring to a different department)? The IRS does not allow tax-favored status for payments made for education related to sports, games, or hobbies, but otherwise does not require the coursework to be job-related.  If your business has a large percentage of college-age employees, consider whether to reimburse coursework in any subject as a recruitment/retention tool for employees pursuing their degrees.  Also consider whether you will require the employee to be enrolled in a degree-granting program or whether the employee can take a single course or enroll in a certificate program.
  • What accreditation will you require?  It is advisable to require that the coursework be provided by an accredited institution.  However, not all accrediting agencies are equal.  Consider requiring that the accrediting agency be recognized by the U.S. Department of Education.
  • How much money will you reimburse and toward what expenses?  Do you want to foot the entire bill or just a percentage?  Will you have a dollar-amount limit by semester, by year, or on a lifetime basis?  Will you pay only for tuition, or also fees, books, supplies, etc.?  Consider how these decisions will impact utilization of the benefit.  For example, if you have a predominantly low-paid, college-aged workforce and choose to pay 20% of tuition costs, will your employees be able to afford the rest, even with financial aid?  If not, the program may be underutilized and the business may not benefit as anticipated.  Remember, only the first $5,250 is eligible to be excluded from wages for federal tax purposes, but this does not limit how much you can offer.
  • Will you require pre-approval of courses?  This is a good idea to ensure that employees do not take courses that don’t meet your program’s criteria and submit the bill only when it’s too late to withdraw.  Requiring pre-approval helps keep everyone on the same page about what will or will not be reimbursed.
  • How flexible will you be with scheduling?  Will you allow employees to switch shifts to attend their desired classes?  Will you allow employees to take time off for exams?  Consider addressing this in your policy.  It is also important to remind employees that coursework must not interfere with work performance and employees are not free to use working time to complete course assignments.
  • What level of success does the employee need to demonstrate in order to receive reimbursement?  Many employers require a grade of “C” or better in order to reimburse coursework.  Some only require a passing grade.  The standards you choose should fit the needs of your business.
  • Will you require continued employment to receive the full benefit? Will you feel that the employee “burned” you if he or she resigns shortly after receiving tuition reimbursement benefits?  Many employers structure the benefit to require the employee to remain employed for a certain period after completion of the coursework in order to receive the full benefit.  This can be done by withholding a portion of the reimbursement until the employee meets this requirement.  More often, the reimbursement is paid upon successful completion of the course with the employee signing an agreement to repay the employer if he or she leaves employment before a certain specified period of time.  It can be a good idea to apply this provision regardless of the circumstances of the employee’s departure, rather than solely if the employee quits.  This is because some employees will, unfortunately, act out to try to get themselves fired so as not to be required to repay tuition.  However, employers should never fire an employee in order to prevent the employee from meeting the time period necessary to keep the reimbursement payment.  This could subject the employer to civil liability on a variety of legal theories.  Employers should be aware that collecting the money back through payroll deductions is often unlawful and, usually, the way to recoup the money is by suing the former employee.

A well-designed tuition reimbursement program can be a great way to build knowledge and skills while boosting employee morale.  Carefully considering how the program is crafted can avoid the buyer’s remorse that comes with handing out reimbursement dollars without adequate safeguards for the company’s interests.

Our team of labor and employment attorneys can assist employers in employee benefits and human resources matters.  Contact us for assistance in creating a tuition reimbursement program or any other employee benefit or policy.