No tax withholding is required on educational assistance benefits provided to State employees for undergraduate courses, up to a $5,250 limit during the tax year. 

Undergraduate benefits that exceed the $5,250 threshold are generally taxable, unless they can be excluded as a "working condition fringe benefit."

In general, educational assistance benefits provided for graduate courses are taxable, unless they can be excluded as a "working condition fringe benefit."

In general, to meet the requirements of the "working condition fringe benefit" exclusion, the benefit must meet the following tests. Specifically, the course:

1. must not be for the purpose of satisfying the minimum educational requirements of the job;
AND
2. must not qualify the employee for a new trade or business;
AND, EITHER
3. must maintain or improve current job skills
OR
4. be required by the employer or by Federal or State law to retain the particular job, title or pay rate.

To illustrate the distinction between educational assistance benefits that qualify for the exclusion from those that do not, attached to this bulletin are several examples taken directly from IRS publications. The following chart recaps the tax rules as described above:

Taxable amounts for 1999 may be entered into PaySR beginning immediately and continuing through pay period 17L (submission date of 11/17 (noon) for Institution cycle checks dated 12/2; submission date of 11/23 (noon) for Administration cycle checks dated 12/8).

If the value of an employee’s educational assistance benefit equals or exceeds $300, agencies should divide the value of the benefit by three and enter one-third of the value of the benefit into PaySR in each of three successive payroll periods, as long as the final entry occurs no later than the pay period 17-Lag/18-Current dates noted above. For example, if an employee’s benefit totals $600, agencies should enter $200 in pay period 15-Lag/16-Current (checks dated November 4 for Institution and November 10 for Administration), another $200 in pay period 16-Lag/17-Current (checks dated November 18 for Institution and November 24 for Administration), and the final $200 in pay period 17-Lag/18-Current (checks dated December 2 for Institution and December 8 for Administration)). This approach will lessen the impact of the tax withholding on employees’ net paychecks by spreading the impact over multiple payroll periods.

These same dates and procedures will be used to process taxable tuition assistance provided through LEAP, PSTP and the M/C tuition reimbursement program.

Agencies may enter the taxable value into PaySR on the TIME ENTRY panel or report the transaction on the MISCELLANEOUS PAYMENTS FILE. Specific reporting procedures are provided below.

Path: Start - Compensate Employees- Maintain Payroll Data U.S. - Use - Time Entry - Add.

2. Enter the following information in the Dialog Box to select the employee:

a. Department - enter the employee's agency code
b. EmplID - enter the employee's social security number
c. Employment Rcd Nbr - enter the employee's record number if other than '0'
d. Pay Period End Date - leave blank, defaults to the current period end date.

3. Click OK

4. On the Time Entry panel, enter the following information:

a. Earnings Begin Date - use the beginning date of the current pay period
b. Earnings End Date - use the ending date of the current pay period
c. Earn Code - enter or select the earnings code EDA for Educational Assistance - Taxable
d. Amount - enter the amount of taxable Educational Assistance
e. Cmts - click on this button if you would like to add comments

1. Type any comments relating to the taxable Educational Assistance
2. Click OK

5. Click the Save button on the tool bar. 

1. Attach additional information to this communication that identifies the specific dates on which the withholding for educational assistance benefits will take place; and,

2. Provide the letter and the attachment to affected employees prior to processing these benefits through the payroll system for purposes of tax withholding. Advance notice will give employees time to prepare for the additional withholding.

Agencies also will receive from OSC (under separate cover), a list of employees who received taxable tuition assistance in 1999 through LEAP, PSTP and the M/C tuition reimbursement program. These employees should also receive a copy of the communication attached to this Bulletin prior to the withholding of taxes (i.e., prior to the first paycheck dates in November).

Questions regarding this bulletin may be directed to the Payroll Deductions mailbox.