This bulletin updates Payroll Bulletin 286 and Payroll Bulletin 292 in relation to the processing and taxation of educational assistance benefits for 2002.
Employees who received a taxable educational assistance benefit through the State's Central Accounting System from a qualified educational assistance program provided by the employer that exceeds the $5,250 threshold during the 2002 calendar year.
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 employees. 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.
Beginning January 1, 2002, 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 the course is job-related or not.
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;
- 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 education 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.
Tax Rules Chart
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, taxable benefits above the $5,250 threshold will be subject to wage reporting and withholding.
Reimbursement for courses processed through the Central Accounting System must be reported to the payroll system in order to effectuate the withholding of taxes.
Taxable amounts for 2002 must be entered into the payroll system to affect an employee's 2002 W-2. Agencies may enter these transactions immediately. Taxable amounts must be entered no later than Payroll Period 18 Lag and Payroll Period 19 Current for both Institution and Administration.
Agencies may enter the taxable value into the payroll system on the TIME ENTRY panel or report the transaction on the MISCELLANEOUS PAYMENTS FILE. Specific reporting procedures are provided below:
Time Entry Instructions
On the Time Entry panel, enter the following information:
- Earnings Begin Date - use the beginning date of the current pay period
- Earnings Earn Date - use the ending date of the current pay period
- Earn Code - enter or select the earnings code EDA for Education Assistance - Taxable
- Amount - enter the amount of taxable Educational Assistance
- Audit Cmts - click on this button if you would like to add comments
- Type any comments related to the taxable Educational Assistance benefits
- Click OK
- Save Panel
Misc. Payments File Instructions
Agencies reporting this information using the Miscellaneous Payments File should use the same data elements as shown above in the Time Entry On-Line Instructions.
Communication to Affected Employees
Attached to this Bulletin is a separate communication for employees to explain the tax rules governing educational assistance benefits and describe 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. 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.
Questions regarding this bulletin may be directed to the Payroll Deductions mailbox.