What Is the IRS Limit for Tuition Reimbursement?

Employer-provided educational assistance represents a significant benefit, allowing employees to pursue further education with financial support from their company. The Internal Revenue Service (IRS) has established specific guidelines that permit this financial assistance to be a tax-free benefit for the employee, enhancing its value.

The Annual Tax-Free Limit

An employee can receive a maximum of $5,250 in educational assistance from their employer each year without it being counted as taxable income. This limit is applied on a per-employee, per-calendar-year basis. This means that if an individual works for two separate employers during the year, they could potentially receive up to $5,250 in tax-free benefits from each employer, provided each has a qualifying plan.

The range of expenses that can be paid for with this tax-free money includes payments for tuition, mandatory fees, and required course materials such as books and supplies. The benefit was also temporarily expanded to cover payments of principal or interest on an employee’s qualified education loans. This provision, however, is set to expire at the end of 2025 unless it is extended by new legislation.

Any assistance an employer provides above the $5,250 annual limit is considered a taxable fringe benefit and is subject to income and payroll taxes. The limit was made a permanent part of the tax code by the American Taxpayer Relief Act of 2012 and has not been indexed for inflation.

Qualifying for Tax-Free Assistance

For the educational assistance to be excludable from an employee’s income, the employer must provide the benefit through a qualified educational assistance program. The requirements for such a program are outlined in Section 127 of the Internal Revenue Code. A primary stipulation is that the employer must have a formal, written plan document that details the terms of the assistance.

The plan must also adhere to specific non-discrimination rules, meaning the program cannot favor highly compensated employees. Furthermore, the plan cannot offer more than 5% of its total annual benefits to shareholders or owners who hold more than a 5% stake in the company. Employers are also required to provide reasonable notification of the program to all eligible employees.

A notable feature of a Section 127 plan is that the education being funded does not need to be related to the employee’s current job responsibilities. The main exception is that the plan cannot cover the costs of courses involving sports, games, or hobbies, unless these activities are part of a degree program or are required for the employee’s job.

Tax Reporting for Reimbursements

Any assistance an employee receives up to the $5,250 threshold is excluded from their gross income. Consequently, this amount will not appear in the taxable wage figures reported in Box 1, Box 3, or Box 5 of the employee’s annual Form W-2.

When an employer provides educational benefits exceeding the $5,250 limit, the excess amount must be treated as taxable income. The employer is responsible for including this excess amount in the employee’s wages on the Form W-2, in Boxes 1, 3, and 5, where it is subject to withholding.

Coordinating with Other Education Tax Benefits

Tax-free employer assistance interacts with other education benefits, like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The IRS prevents “double-dipping,” which means an employee cannot use the same educational expenses for more than one tax benefit. Expenses paid with tax-free funds from an employer’s plan cannot also be used to qualify for the AOTC or LLC.

To illustrate, consider a student-employee whose total tuition and required fees for the year are $9,000. If their employer provides $5,250 in tax-free educational assistance, the employee can only use the remaining $3,750 of out-of-pocket expenses to determine their eligibility for an education credit.

Employees should carefully track their total qualified education expenses and the amount of tax-free assistance received. By subtracting the employer-provided benefit from their total costs, they can accurately calculate the amount of expenses that may still be eligible for other valuable education credits on their personal income tax return.