Education Benefits: A Win-Win for Owners and Employees

With baby boomers moving toward retirement, the conversation needs to focus on the company culture and compensation structures millennials find attractive. As the country’s most educated generational cohort, millennials have demonstrated a clear interest in working environments that provide intellectual stimulation and are rich in growth opportunities and education benefits.

The economics of staff retention alone should be sufficient to warrant spirited discussion at a partner roundtable. According to the latest Deltek Clarity Architects and Engineering Industry Survey, the average U.S. and Canadian firm needs to manage staffing levels to address 4.7 percent in annual growth and fill gaps created by a 13.7 percent employee turnover rate. This human resources challenge comes at a fairly high cost:

• Firms may need to use external recruiters to identify high performing individuals. These services typically assess fees on the order of 25-33 percent of the first year salary. Firms using in-house resources incur labor costs as well as advertising expense to generate interest and process the responses.
• The resume screening and interview process may consume a considerable amount of time, thereby reducing billable hours, and may require travel expense reimbursement.
• New hires could require months of training and onboarding before becoming fully productive all the while impacting the productivity of senior associates and partners.
• Client relationships may suffer if a valued member of the team unexpectedly disappears from the corporate roster.

Fortunately, the tax code supports two types of programs that provide attractive development opportunities for employees while delivering tax benefits for their employers.

You can offer to cover employee educational expenses to the extent that they relate to their current occupations. Coursework could enhance their knowledge, develop new skills, confer new professional credentials, or pave the way for advancement. It cannot prepare employees for entirely new lines of work or be non-job related. Firms are permitted to characterize working condition fringe benefits as employee education expenses, not wages. As such, they are not subject to income or payroll taxes, which results in savings for both the firm and the employees. To date, there is no ceiling on the education benefits workers can receive tax-free, although the firm may choose to set its own limits.

A formal employee educational assistance program enables firms and their employees to enjoy the aforementioned favorable tax treatment for job-related and non-job-related educational expense. As with the working condition fringe benefit, there is no ceiling for job-related expenses. However, employees can exclude from income up to $5,250 in non-job-related expenses. Such expenses may include tuition, fees, books, equipment, and supplies. Equipment and supplies are excluded if they continue to provide ongoing utility after the coursework ends.

To qualify for favorable tax treatment, firms must describe their education benefits either in a separate formal written document or as part of the firm’s policies and procedures manual. They also must provide reasonable notice to all eligible employees about the program’s terms and conditions. The employee educational assistance program cannot favor highly compensated workers and their dependents or provide more than five percent of the total annual benefit to shareholders, owners, and their dependents.

Education benefits can help you retain valuable employees while reaping the bounty of their newfound knowledge and skills. While the spotlight often focuses on millennials, seasoned employees may be just as hungry to stimulate their brains, sharpen their skills, and learn about new techniques and technology. They are valued for their depth and breadth of experience on the job as well as their ability to guide younger associates in the practical application of their craft.

At the end of the day, you want all valued employees to have the means to pursue their professional interests within your firm.