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Date:November 9, 2007
Bulletin Number: 759
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Subject

Educational Assistance Benefits

Purpose

To provide agencies with information regarding the processing and taxation of educational assistance benefits for 2007.

Affected Employees

Employees who received qualified educational assistance benefits that exceed the $5,250 threshold for the 2007 calendar year through the State’s Central Accounting System and/or CSEA, PEF or GOER.

Tax Rules

In general, gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a qualified educational assistance program.

A qualified program may benefit only the employee.  A program that provides benefits to spouses or dependents of employees is not a qualified program.  Benefits paid from an unqualified program are fully taxable.

The exclusion of up to $5,250 per year of educational assistance benefits received from a qualified program provided by an employer applies to both graduate and undergraduate courses, whether or not the course is job-related.

Benefits from a qualified educational assistance program that exceed the $5,250 threshold are generally taxable unless they can be excluded as a “working condition fringe benefit.”

To meet the requirements of the “working condition fringe benefit” exclusion, the benefit must meet certain tests.  Specifically, the course:

  • Maintains or improves skills that an employee is required to have for employment; or
  • Is expressly required by the employer or is legally required in order to retain an established employment relationship, status or rate of compensation.

The following types of educational instruction do not qualify as job-related:

  • Courses needed to meet the minimum educational requirements to qualify for employment; or
  • Education that will qualify an employee for a promotion or transfer to a new trade or business.
OSC Actions

OSC will issue Control-D report NPAY758 (Educational Assistance Reported to OSC).  A message will be posted to the PayServ bulletin board when this report is available to agencies.

Agency Actions

Taxable amounts for 2007 must be entered into the payroll system to affect an employee’s 2007 W-2 Statement. Agencies may enter these transactions immediately.  To reduce the tax burden on the employee’s last paycheck of the year, it is advisable to spread the reportable educational assistance over the last two paychecks of 2007.  For the Institution payroll cycle, this will be Pay Periods 17 and 18 Lag and Pay Periods 18 and 19 Current; for the Administration payroll cycle, it is Pay Periods 17 and 18 Lag and Pay Periods 18 and 19 Current.

For the Institution payroll cycle, taxable amounts must be entered no later than Pay Period 18 Lag (November 22 through December 5, 2007) and Pay Period 19 Current (December 6 through December 19, 2007).

For the Administration payroll cycle, taxable amounts must be entered no later than Pay Period 18 Lag (November 29 through December 12, 2007) and Pay Period 19 Current (December 13 through December 26, 2007).

Agencies must enter the taxable value into the payroll system using the earn code EDA on the Time Entry page or report the transaction through the agency Miscellaneous File.

Communication to Affected Employees

A letter explaining the tax rules governing educational assistance benefits and describing how the educational assistance amounts will be displayed on the employee’s pay stub or direct deposit advice statement is attached. (Attachment A). 

Agencies are strongly encouraged to:

  • Provide the letter to affected employees prior to processing these benefits through the payroll system.  Advance notification will give employees time to prepare for the additional tax withholding.
  • Include additional information with this letter that identifies the specific dates on which the withholding for education assistance benefits will take place.
Questions

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