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Date: November 5, 2004 Bulletin Number: 513
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Subject

Educational Assistance Benefits

Purpose
To provide agencies with information regarding the processing and taxation of educational assistance benefits for 2004.

Affected Employees
Employees who received qualified educational assistance benefits that exceed the $5,250 threshold for the 2004 calendar year through either the State’s Central Accounting System and/or CSEA, PEF and 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 criteria. 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 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.

Agency Actions

Taxable amounts for 2004 must be entered into the payroll system to affect the employee’s 2004 W-2. Agencies may enter these transactions immediately.

For Institution Cycle, taxable amounts must be entered no later than Pay Period 18-Lag (November 25 through December 8) and Pay Period 19-Current (December 9 through December 22).

For Administration Cycle, taxable amounts must be entered no later than Pay Period 19-Lag (December 2 through December 15) and Pay Period 20-Current (December 16 through December 29).

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. For information regarding submission of Time Entry transactions, refer to Payroll Bulletin No. 408.

Communication to Affected Employees

Attached to this Bulletin is a communication that explains the tax rules governing educational assistance benefits and describes how the educational assistance amounts will be displayed on the pay stub/advice statement (Attachment A). Agencies are strongly encouraged to:

  1. 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 withholding.
  2. Attach additional information to this communication 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 Deductions mailbox.