Educational Assistance

This exclusion applies to educational assistance you provide to employees under an educational assistance program. For expenses relating to courses beginning in 2002, the exclusion also applies to graduate level courses.

Educational assistance means amounts you pay or incur for your employees' education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition. Also, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education:

1. Has a reasonable relationship to your business, or
2. Is required as part of a degree program.

Education expenses do not include the cost of tools or supplies (other than textbooks) that your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation.

Educational assistance program. An educational assistance program is a separate written plan that provides educational assistance only to your employees. The program qualifies only if all of the following tests are met.

1. The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining.
2. The program does not provide more than 5% of its benefits during the year for shareholders or owners. A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business.
3. The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance.
4. You give reasonable notice of the program to eligible employees.

Your program can cover former employees if their employment is the reason for the coverage.

For this exclusion, a highly compensated employee for 2002 is an employee who meets either of the following tests.

1. The employee was a 5% owner at any time during the year or the preceding year.
2. The employee received more than $90,000 in pay for the preceding year.

You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year.

Employee. For this exclusion, treat the following individuals as employees.

1. A current employee.
2. A former employee who retired, left on disability, or was laid off.
3. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
4. Yourself (if you are a sole proprietor).
5. A partner who performs services for a partnership.

Exclusion from wages. You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year.

Assistance over $5,250. If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you can exclude the value of these benefits from wages if they are working condition benefits. Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. See Working Condition Benefits, later.

Form 5500. Generally, if you maintain an educational assistance program, you must report information about the program each year by the last day of the 7th month after the program year ends. Use Form 5500 and Schedule F (Form 5500). However, if the education assistance program provides only job-related training that is deductible by the employee as an ordinary and necessary business expense, you are not required to file Form 5500. See the form instructions for information on extensions of time to file.

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