It’s no secret that college costs are on the rise. Many students rely on scholarships, financial aid, or student loans to get their degree — so they can get into the workforce. However, many students are also faced with the harsh reality of fairly stagnant wage growth.
As an employer, how can you attract top talent and create a win-win situation for you and your employees?
One idea is to help reduce their burden of paying for college and continuing education. A study by the International Foundation of Employee Benefit Plans (IFEBP) found that 83% of organizations offered some form of education or tuition assistance to their workers. Of those surveyed organizations, 75% said that their implementation of education assistance had been successful.
And the good news is that as an employer, you can qualify for favorable tax benefits in exchange for helping your employees pay for their education. The rules for that are covered in Section 127 of the IRS tax code. In this short blog post, we break down how a Section 127 Plan can help your employees and potentially reduce your tax bill at the same time.
Tax Strategy: Section 127 Plan
Section 127 Plans allow employers to help cover the cost of educational expenses for their employees (up to $5,250 per employee). That assistance is typically tax deductible to the employer. And, since payments made under Section 127 are excluded from income for the employee, they are not subject to FICA tax for either the employee or employer. Employees can also potentially avoid state and federal income tax (as long as payments are made in compliance with the Plan).
So, in many ways, a Section 127 Plan can be the best of both worlds — if it is right for you and your company.
Since the start of the COVID-19 pandemic, Section 127 Plans have received an additional boost. Per the CARES Act, employers can help employees with paying back student loans. This feature has since been extended through the end of 2025 with the passing of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. So, Section 127 Plans aren’t just for ongoing education expenses any more!
A nice thing about Section 127 Plans is that the funds can be used for either graduate or undergraduate education costs. This can help employees earn advanced degrees to further their value in the company, or provide young employees an opportunity they may not get otherwise. In the same survey from IFEBP, they found that 52% of organizations use the offering as a way to retain current employees. With rising college costs, being able to offer any form of education assistance is a plus and a significant value-add for many workers.
Advantages:
- Employers can exclude up to $5,250 paid to each employee
- Can be used as a tool to retain employees
- Can help companies attract talent
- Funds can be used for student loan repayment through 2025
Caution:
- The plan cannot favor highly compensated employees, owners, or family members
- Assistance cannot exceed $5,250 per calendar year per employee
- The plan cannot offer additional benefits other than education
- Eligible employees must be notified of the offering
Savings Range:
- 10–37% at the Federal level + state tax rate
Good Business: Section 127 Plan
Adding an education assistance program can be a great employee benefit and a way to lower taxes. You receive a tax benefit; your employees receive much-needed relief.
However, it’s important to remember that the annual limit is $5,250 per employee, no additional incentives can be offered under this plan other than educational expense assistance, and the benefit must be offered to all employees. In our experience, that last point can be a significant hurdle because $5,250 can add up quickly across a larger workforce. Make no mistake, this can be a significant investment you would be making in your workforce!
Here at TreMonte, we can help you figure out if your situation would benefit from incorporating a Section 127 Plan into your company’s benefits package. Reach out to a member of our team today!
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