Fringe benefit?

[PMC]

Employer will soon be adopting a program whereby they will be providing employees some compensation for educational purposes. The specifics of who would qualify and what they consider "educational purposes" are unknown to me at this time. But they did say it would be for employees OR family members.

Their Plan currently uses a safe harbor definition for comp. and excludes fringe benefits. They want to exclude any payments made for educational purposes from their definition of compensation.

IRS Pub 15-B describes fringe benefits for educational assistance as being for the "Employee." Do you think this form of "compensation" paid to the employee could be considered a fring benefit falling within the safe harbor fringe exclusion? Or would the fact that it could be for the employees family member preclude it from being considered a fringe benefit within 15-B?

[masteff]

I think you'd need to look at 2 separate groups... employees and non-employees. One is an education assistance program, the other is a scholarship program.

The following article might give you some ideas on code sections to review: http://www.aicpa.org/PUBS/JOFA/sep2004/fenton.htm

[Lori Friedman]

The employer needs to make a few decisions:

1. Who can receive educational benefits? Will participation be limited to employees, or will benefits also be provided to employees' spouses and/or dependents?

2. What type of education? Will benefits be limited to job-related training and education, or will the plan also provide non-job-related educational benefits?

3. Does the employer intend to make the benefit non-discriminatory, or will it be restricted to executives, managers, and other highly-compensated individuals?

[PMC]

Thanks for the responses.

Lori - from the small amount of info. I have on this - any amount included in the employee's pay will be for either the employee or the employee's family member. So it won't be restricted to job-related educational assistance and it will be made based on some qualifications (TBD) but not restricted to managers or HCEEs.

Would this precelude it from being considered a fringe benefit that would fall under 15-B and be able to be included in the safe harbor fringe exclusion for comp. in your estimation?

[Lori Friedman]

Based on the limited information that you have, I believe that the employer would be providing taxable employee compensation. I'm guessing that this isn't the employer's intention.

If the employer's goal is to provide tax-free educational benefits for both employees and their dependents, there are two approaches that might work:

1. Adopt an I.R.C. Sec. 117 qualified scholarship program for employees and their children and other dependents. The benefit requirements are described in Rev. Proc. 76-47.

2. Adopt both an I.R.C. Sec. 127 qualified education assistance program (qualified EAP) for employees and an I.R.C. 117 qualified scholarship program for family members.

Here's a brief summary of a Sec. 127 qualified EAP:

- There's no requirement that the education be job-related or for improving job skills.

- The benefit is nontaxable to an annual maximum of $5,250.

- The plan must exclusively benefit employees; it can't cover the education expenses of family members.

- A qualified EAP plan can't discriminate in favor of highly-compensated employees.

- There's no Form 5500 filing.

There are numerous Internal Revenue Code sections that provide excludable (or partially excludable) educational benefits. If the employer determines exactly what types of education it wants to fund, and for whom, it can probably find the right fit for its resources and objectives.