As the U.S. economy stands at the brink of a “fiscal cliff” — a combination of tax increases and spending cuts by the federal government set to take effect Jan.1 unless a deal is worked out before then — the way corporate tuition assistance programs are taxed also hangs in the balance.
If the Budget Control Act of 2011 is allowed to go into effect Jan. 1, tuition reimbursement money may become taxable. Currently, any money given to employees for continuing education is distributed on a pre-tax basis, under two sections of the tax code.
Most companies use the section of the code that caps pre-tax spending at $5,250 per employee and allows employees to use the money for education pertaining to their current or future careers. However, this section of the tax code will be reversed if the law is allowed to go into effect — meaning the second remaining section, which does not have a cap of pre-tax dollars and mandates that the funds be used only for education pertinent to the employee’s current job, not “future” jobs, will stand on its own.
Why should learning leaders be concerned? For starters, any employee who submits a reimbursement after the start of 2013 could receive a check for far less than expected — likely less than the cost of the course. And with reimbursements generally peaking during the winter (December and January) and spring (May and June) periods, most companies will process more than 50 percent of all tuition reimbursements during those four months.
That means that, despite actually taking the course in 2012, the repayment won’t reach the employee until the 2013 tax year.
Companies offering tuition assistance programs need to make some plans for handling this change soon. Companies first need to investigate how their current tuition reimbursement plan works. Is the company using Section 127 (the section that caps pre-tax dollars and opens the door for courses for current and future development), Section 132 (the one that doesn’t) or both?
If the company is using Section 127, the next step is to assess the impact of the fiscal cliff.
To be sure, there’s a chance that the Budget Control Act of 2011 will be repealed in 2013 and that the tax provisions allotted prior to Jan. 1 will be reinstated retroactively. That means that if you do change your administrative processes to process checks post-tax after the beginning of the new year, you may be able to go back and reprocess these transactions pre-tax if the tax treatment is allowed retroactively.
If a company opts to reimburse on a post-tax basis, it could always decide to “gross-up” an employee’s reimbursement so that it covers the entire cost of the course on a post-tax basis. This process is confusing and labor intensive to say the least. And again, this added money would need to be recouped if the tax treatment were to be reinstated retroactively.
Other companies may consider switching their tuition assistance program’s tax treatment from Section 127 to Section 132 for tax year 2013 and beyond. But this may or may not be as simple as it sounds. There may be other tax implications in doing so. If this is the intended course of action, a tax adviser must be consulted.
Whatever course of action a company decides to take must be communicated to employees to minimize confusion and apprehension, especially among those workers midway through a degree program. With the end of the year looming, reimbursement requests are now coming in daily and will continue to do so through the first of the year. The time to communicate is now.
Teri Shipp is vice president of client services and marketing for EdAssist, a managed education provider. She can be reached at editor@CLOmedia.com.