This bulletin updates Payroll Bulletin 201 in relation to the processing and taxation of educational assistance benefits for 2001
Employees who received a taxable employer-provided educational assistance benefit during the 2001 calendar year
The tax rules governing employer-provided educational assistance benefits are the same in 2001 as they were last year. In general, job-related educational assistance benefits are not taxable; non-job-related benefits are taxable, with the following clarifications and exceptions:
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."
To meet the requirements of the "working condition fringe benefit" exclusion, the benefit must meet the following tests. Specifically, the course:
- Must not be for the purpose of satisfying the minimum educational requirements of the job;
- Must not qualify the employee for a promotion or transfer to a new trade or business;
- Must maintain or improve current job skills required by the employer or by Federal or State law to retain the particular job, title or pay rate.
The following chart recaps the tax rules as described above:
|Type/Level of Benefit||Excludable (Non-Taxable)||Reportable (Taxable)|
|I. Undergraduate Level|
|II. Graduate Level|
As noted above, undergraduate benefits above the $5,250 threshold that do not meet the requirements of the working condition fringe benefit exclusion and graduate level benefits that do not meet these requirements are subject to wage reporting and withholding.
LEAP, PSTP AND M/C TUITION PROGRAMS
OSC receives directly from the LEAP, PSTP and M/C Tuition Reimbursement Program administrators, the data necessary to post the taxable fringe benefit amount to the respective employee payroll history.
- If the value of an employee's educational assistance benefit equals or exceeds $300, OSC will divide the value of the benefit by three and report one-third of the amount in each of the last payroll periods of the calendar year
- For example, if an employee's benefit totals $600, $200 will be reported in pay period 16L/17C (checks dated November 21 for Administration and November 29 for Institution), another $200 in pay period 17L/18C (checks dated December 5 for Administration and December 13 for Institution), and the final $200 in pay period 18L/19C (checks dated December 19 for Administration and December 27 for Institution). This approach will lessen the impact of the tax withholding on employees' net paychecks by spreading the impact over multiple payroll periods.
Communication to Affected Employees
Attached to this Bulletin is a separate communication for employees that, briefly explains the tax rules governing educational assistance benefits and describes how the educational assistance amounts will be displayed on the pay stub. Agencies are strongly encouraged to:
- Provide the letter 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 and,
- Attach additional information to this communication that identifies the specific dates on which the withholding for education assistance benefits will take place.
Report (NPAY 758) identifying employees in your agency who received taxable tuition assistance in 2001 through LEAP, PSTP, and the M/C Tuition Program is now available in reveal. These employees should also receive a copy of the communication attached to this Bulletin prior to the withholding of taxes.
Questions regarding this bulletin may be directed to the Payroll Deductions mailbox.