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Date: October 28, 2005 Bulletin Number: 587
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Subject
Educational Assistance Benefits
Purpose
To provide agencies with information regarding the processing and taxation of educational assistance benefits for 2005.
Affected Employees
Employees who received qualified educational assistance benefits that exceed the $5,250 threshold for the 2005 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 2005 must be entered into PayServ to affect the employee’s 2005 W-2. Agencies may enter these transactions immediately.

For Institution cycle, taxable amounts must be entered no later than Pay Period 18-Lag (November 24 through December 7) and Pay Period 19-Current (December 8 through December 21).

For Administration cycle, taxable amounts must be entered no later than Pay Period 18-Lag (December 1 through December 14) and Pay Period 10-Current (December 15 through December 28).

Agencies must enter the taxable value into PayServ 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 paycheck stub/advice statement (Attachment A). Agencies are strongly encouraged to:
  • Provide the letter to affected employees prior to processing these benefits through PayServ. Advance notification will give employees time to prepare for the additional withholding.
  • 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.