Tuition reimbursement is a fringe benefit offered to employees that allows them to recover a portion of their tuition from their employer should they choose to further their education. Employer plans vary, but typically you are reimbursed for your tuition expenses once you have completed and passed the course. As with other IRS regulations, whether tuition reimbursement is taxable depends on a variety of factors.
For your employer's tuition reimbursement plan to be exempt from federal taxes it must be a written policy that benefits only employees; it cannot favor highly paid executives; more than 5 percent of its benefits annually cannot go to shareholder's or owners; you cannot substitute the tuition reimbursement money for cash or other goods or services that would be taxable; and your employer must give reasonable notice to you and your fellow employees about the program.
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Your employer can include you in the tuition reimbursement program if you are a current employee; former employee off on disability, retired or laid off; a leased employee if you worked full-time for a substantial part of the year; the employer; and a partner who performs partnership activities. A highly compensated employee is eligible for assistance but must receive the same benefit as other employees. If you were a 5 percent owner in the current or previous year, or you received over $115,000 in the preceding year (as of 2012), you are considered a highly compensated employee.
Your employer can only exclude up to $5,250 of educational assistance from your gross wages each year. Under certain circumstances, he can exclude reimbursement in excess of $5,250 if the education is a working condition benefit, which would have been deductible as a business expense had you paid for it yourself. For this benefit to apply, the education must be job-related.
If you work for an educational institution and receive reduced or free tuition as a benefit, the benefit can be excluded from your income, but the rules vary for undergraduate and graduate studies. If the tuition benefit is for undergraduate studies, it is excluded from your gross income if you are a current employee; an employee who retired or left on disability; the surviving spouse of a deceased employee; one who retired or left on disability; or a dependent child or spouse in one of the previous categories. If you are a graduate student, the tuition is only excluded if you teach or perform research for the institution providing the benefit.