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The Many Benefits of an Employer Tuition Reimbursement Program & Policy

While they may not have a line item on a balance sheet, employees are your company’s most important asset. Their knowledge, skill sets, and expertise impact your ability to keep customers or clients satisfied and improve your bottom line.

A tuition reimbursement program is an employee perk that shows you’re invested in their long-term success.

What is Tuition Reimbursement?

Just as it sounds, tuition reimbursement in an employee benefit program or policy where the employer pays back employees for education expenses. Although the program’s rules vary from employer to employer, most cover the cost of tuition as well as textbooks and other required course materials.

Employees still have to pay out of pocket for the courses they take, but when the course is over, the employee can get back some or all of their tuition expenses. At some institutions, students with financial constraints qualify to defer payment until their coursework is complete.


Advantages of an Employer Tuition Reimbursement Program

The Society for Human Resource Management (SHRM) 2019 Employee Benefits survey notes more than half of employers (56%) offer some sort of tuition or student loan repayment assistance for employees, so education is clearly a priority for businesses.

1. More Skilled Employees

As the International Labour Organization (ILO) states, “Many of today’s skills won’t match tomorrow’s jobs, and skills acquired today may quickly become obsolete.” So workers need to update their skills on an ongoing basis.

Investing in your employee’s education can help you custom-build the skills, talent, and expertise you need to grow your business today and in the future.

2. Higher Retention Rates

Employees who take advantage of tuition reimbursement tend to stay with the company longer.

The Harvard Business Review noted one powerful example: when Fiat Chrysler Automobiles partnered with Strayer University to allow its dealership employees and their families to earn a degree free of charge, participating dealerships saw employee retention rates increase by nearly 40%.

3. Lower Recruiting Costs

Companies can promote educated employees to higher-level positions, saving the company time and money compared to filling vacancies with outside talent.

According to SHRM, the average cost of hiring a new employee is $4,425, or $14,936 for hiring an executive. That includes the cost of advertising the position, training, conducting interviews, and providing new hire orientation. Plus, it can take months for the new hire to acclimate to company culture and become fully productive.

On the other hand, promoting people from within generates little if any additional cost to the company.

4. Tax Breaks

The IRS allows employers to write-off up to $5,250 of tuition reimbursements per employee per year. These reimbursements are considered a tax-free fringe benefit, so they aren’t included in the employees’ wages, and the employer doesn’t have to pay Social Security, Medicare, federal or state unemployment taxes on the reimbursement.

To qualify for this tax perk, the tuition reimbursement plan has to be in writing and meet other requirements, including:

  • The program can’t favor highly compensated employees — generally defined as someone who owns at least 5% of the business or received more than $130,000 of compensation in the prior year.
  • The program doesn’t provide more than 5% of its benefits to shareholders, business owners, or their spouses or dependents.
  • The program doesn’t allow employees to opt to receive cash or other benefits instead of educational assistance.
  • All eligible employees have to receive reasonable notice of the program.

You can find more information about the IRS requirements for educational assistance benefits in IRS Publication 15-B.


Eligibility for Reimbursement

Employers can determine their conditions for reimbursement of employee tuition. Some common conditions include:

Length of Service and Performance

The first condition that may limit eligibility is length of service. Many employers offer tuition reimbursement only to full-time employees who have worked at the company for at least six months to a year. They also require the employee to still be employed with the company when they complete the course.

Employers can also require that the employee is meeting all performance expectations for their current position or require that the employee hasn’t been formally disciplined during the previous six to 18 months. The definition of discipline can vary from company to company but typically includes written warnings, demotions, or suspensions.

Program of Study

The next condition that may hinder eligibility is course of study. Many employers require that the courses or degree program can be applied within the organization. For example, a consulting firm may broadly define relevant subjects; on the other hand, a small IT firm may only reimburse specific technology-related courses.

The program can also require the employee to take classes only at a pre-approved educational institution such as a local university or community college or an accredited online college.

Cost

Another potential condition is the level of cost the company is willing to reimburse. Most tuition reimbursement programs have an annual cap on what they’ll cover. This limit varies greatly from company to company, but most employers base their caps on IRS limits.

As mentioned above, the IRS allows employers to deduct up to $5,250 of tuition costs per employee each year. Employers who pay more than $5,250 for an employee’s educational benefits during the year have to include it in the employee’s wages and pay all applicable payroll taxes, thus negating the tax benefits of the program.

Grades

An employer can require the employee to earn a passing grade to qualify for tuition reimbursement. For example, the policy may require that the employee passes the course with a letter grade of C or better.

Employers can also have scaled grade requirements. For example, the employer’s tuition reimbursement plan may specify that an A grade receives full reimbursement, a B grade receives 80% reimbursement, a C grade garners 60% reimbursement, and anything below a C is not eligible.


Final Word

A tuition reimbursement program is an attractive benefit that can help companies find, develop, and hold on to skilled talent. How you design your program depends on the needs of your business and employees.

If you want to try it out, consider starting by reimbursing employees for one work-related course per year, subject to manager approval. This will give you an idea of how popular the program will be with your employees, and you can decide whether to expand it in the future.

Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.

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