Back to School: Tuition Reimbursement Benefits for Employers

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The benefits of tuition reimbursement programs for employers have been self-evident to companies for decades, but sometimes it helps to go “back to school” on this topic and revisit exactly why organizations should consider this a priority program.

One of the best examples I know of dates back to the 1930s….

Once upon a time (1931 to be exact), Walt Disney Productions was riding a hot streak. While it was still on financially shaky ground, Mickey Mouse cartoons were a sensation and the studio was growing. But Silly Symphonies, the series featuring one-off stories sans Mickey, still hadn’t reached its full potential in the estimation of Walt Disney.

While the company was employing more animators than ever, Walt had grander visions for the cartoon series and wanted higher quality productions. And so, as recounted in Walt Disney: An American Original, Walt Disney Productions began sending animators to night school at Chouinard Art Institute to learn more about how people and animals moved so that these and real-life scenarios could be caricaturized properly in Silly Symphonies.

Not only did the company pay for tuition, but the person that chauffeured employees to and from classes at night was… none other than Walt Disney himself. The positive impact of these classes would eventually lead to the formation of the studio’s own Disney Art School.

Times have changed, but tuition reimbursement benefits for employers remain significant. I’ve summarized some of them for you here. As an added bonus, you probably won’t have to drive workers-turned-students to class personally today to realize these benefits.

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Tuition Reimbursement Helps Companies Attract Talent

SHRM’s 2018 Employee Benefits survey report found 51% of organizations now offer undergraduate educational assistance and 49% offer graduate educational assistance.

From a job seeker standpoint, this means that one out of every two employers can point to tuition reimbursement programs as a benefit for talent acquisition and retention purposes.

Job seekers often make a list of pros and cons when weighing to accept an offer or stay with their current employer. Today, HR stakeholders want – and I’d argue need – “tuition reimbursement” to be in the pros column favoring their company over the competition for top workers.

Tuition Reimbursement - List of Benefits Image

While the prevalence of tuition reimbursement programs today is impressive, it still falls short of the prevalence of similar programs before the Great Recession of the late 2000s, when many employers slashed these benefits.

Prior to that economic downturn, SHRM found more than 70% of employers offered undergraduate tuition reimbursement.

That means there’s still a long road to travel to get back to the earlier heyday of employer-sponsored tuition reimbursement.

And there’s a big reason it may be wise for HR decision-makers and brokers to view this mission to make up lost ground as a race they can’t afford to lose. It’s name: Millennials….

Tuition Reimbursement Programs Appeal to Millennials

People can’t stop thinking about Millennials in the workplace. Literally. Need proof? Here’s how often people have been searching for “Millennials in the workplace” on Google recently:

This makes a lot of sense as the Millennial generation now comprises the majority of the American workforce. For a business to have the people they need, they need to be great at fishing from the Millennial pond.

In fact, in a recent Allegis Group survey of more than 1,000 HR decision-makers, 49% of respondents said that they are concerned with their organization’s ability to attract and retain Millennials and Gen Zs.

In that same study, 62% said that failing to attract and/or retain Millennial or Gen Z employees could have a negative impact on the business.

How does that tie back to the benefits of tuition reimbursement for employers?

I’m glad (I pretended) you asked.

Well, if we accept that recruiting and retaining Millennials is a priority HR goal, than any benefit that helps employers achieve that goal is therefore a priority HR means-to-an-end.

And that leads us to, yup, you guessed it: tuition reimbursement.

In the State of the American Workplace survey report, Gallup found that 45% of Millennials say they would change their job for tuition reimbursement benefits. By comparison, only 24% of Gen X and Baby Boomer respondents said they’d make the change.

Essentially, tuition reimbursement has become 21% more important to the workforce over time.

The question for HR decision-makers and brokers than is: has the tuition reimbursement program been prioritized at least 21% more by the organization to keep up with what employees want?

62%

of HR decision-makers say that failing to attract and/or retain Millennial or Gen Z employees could have a negative impact on the business

Tuition Reimbursement Helps Employers Build a More Capable Workforce

Remember the Walt Disney example at the beginning of this post. He saw the raw talent of gifted employees and wanted to refine it, to elevate it. The same holds true for organizations today.

Additionally, while paying for college is a pain point for individuals, the actual education received by college graduates today is a sore spot for many employers.

According to a Gallup-Lumina Foundation survey, only 11% of employers strongly agreed that graduating students have the skills and competencies that their businesses need.

However, 17% of respondents strongly disagreed that graduates had the necessary skills for their business.

Higher education institutions in this country are graduating students with the skills and competencies that MY business needs.

Companies need to find a way to close talent gaps and ensure they have a better-prepared workforce.

What’s the answer? Start with the workforce you already have to custom-build the workforce you need.

Imagine you’re running a Major League Baseball team that needs help in a lot of areas. (I’m taking the high road, but just know I have lots of thoughts about my beloved-but-bewildering Baltimore Orioles here.)

You essentially have two main ways of dealing with the situation:

  1. Bring in net new players to fill the void through the draft, free agency, or trades
  2. Find a way to get better performances from your existing roster and minor league players

Here are those same options translated to human capital:

  1. Hire someone with the education you need and teach them your organization- or industry-specific competencies
  2. Take existing employees with organization- and industry-specific competencies and improve or adjust their skillset through education

Employee tuition reimbursement programs help with both, but let’s stick to number two for purposes of this section.

Tuition reimbursement programs give Human Resources the ability to properly incentivize workers that already know the ins-and-outs of the company/industry and are known to have the skills that aren’t necessarily taught as part of an academic education – things like collaboration, task prioritization, organization, team management, relationship building, creative problem-solving, etc.

If you have a known commodity like that, tuition reimbursement can help you develop your promising “minor league” employees of today into your “major league” contributors of tomorrow.

Tuition Reimbursement Can Reduce Turnover and Costs

If the above-mentioned benefits weren’t enough, employers can build employee loyalty into tuition reimbursement programs through contractual stipulations. This guarantees the sponsoring organization will have turnover-proof employees for months or years as well as a relatively risk-free investment in their workforce.

My wife is a nurse practitioner, and the only way she was able to become a nurse practitioner was by utilizing the tuition assistance benefits offered by her employer at the time she decided to pursue her Master’s degree.

Employer loyalty was part of the terms of that program. When I asked her for details about her experience with that, she said:

“Andrew, I don’t think I want to be in whatever you’re writing. But I was committed to working for [my employer] for a year after completing my last class. If I left before that I would have had to repay the tuition. Could you please mow the yard later?”

Author's Patient Wife

Yardwork aside, the important point is that employers can protect their investment in their workforce with tuition reimbursement program design, fairly exchanging an employee’s commitment to the company for the company’s commitment to bettering the employee. Win-win.

Education assistance can be particularly helpful for companies in industries with notoriously poor employee retention rates. More than 70% of workers in the restaurant industry, for example, changed jobs in 2017, according to the Bureau of Labor Statistics.

Education Assistance Program - Happy Employee Retained As reported by CNBC, many big-name restaurant chains have found success in combatting high turnover with college tuition reimbursement. Starbucks, for example, reported that its program enrollees were 1.5 times more likely to stay with the company and 2.5 times more likely to be promoted compared to employees that did not enroll.

The ability for employers to customize their program makes tuition reimbursement one of the more flexible voluntary benefits for employers as well. Some of the many program guidelines companies can define include:

  • Requiring managerial and organizational approval beforehand.
  • Requiring that the degree or field of study is tied to the employee’s role or company needs.
  • Stipulating that tuition will only be reimbursed for courses taken at specific educational institutions.
  • Requiring employees to achieve grades at or above certain thresholds – often a 2.0 grade-point average – to receive the full tuition benefit.
  • Creating a reimbursement cap like $2,500 per semester, for example, to keep the benefit within the organization’s budget.
  • Providing education assistance only to employees that have been with the company for a set amount of time and/or work a qualifying amount of hours.
  • Requiring employees to apply for applicable federal financial aid before utilizing company education benefits.

(A fair warning to HR regarding financial caps: make sure you are monitoring post-secondary education costs and making cap adjustments accordingly. Failing to do so may lead to a cap that is far too low and leads to underutilized tuition reimbursement.)

Ensuring that a tuition reimbursement program balances the need for education with the realities of the business can lead to bottom-line human capital savings as the need to recruit and train new employees is diminished.

In one example, a Lumina Foundation study found that Cigna was able to save $1.29 in reduced turnover and recruiting costs for each $1 the company put into its education assistance program.

Program participants were also found to be more likely to stay at the company, receive promotions, and earn higher salaries than colleagues that did not participate.

Tuition Reimbursement Comes with Employer Tax Savings

In addition to cost savings realized by reducing turnover-related costs, tuition programs can offer employers a way of reducing their tax burdens.

For all employers, adhering to Sections 127 and 132 of the Internal Revenue Code (IRC) or failure to do so will determine the tax-exempt status of companies’ educational reimbursements.

The following is an overview, but always seek out the advice of tax advisors prior to making any tax-related decisions.

Section 127: Qualified Educational Assistance Programs

Under IRC Section 127, an employer can deduct up to $5,250 per calendar year for each employee that qualifies for and elects to utilize the employer’s qualified educational assistance plan.

Per the IRS’ Fringe Benefits Guide, Section 127 defines a qualified educational assistance plan as meeting the following criteria:

  • The employer must have the components of the qualified educational assistance plan documented in writing.
  • The plan may not offer other benefits that can be selected instead of education.
  • If the employee has multiple employers, the benefit cannot exceed $5,250 per calendar year for all employers combined.
  • Eligible employees include current and/or laid off employees, retired employees, employees on disability, and certain self-employed individuals.
    • Employees’ spouses and dependents are not eligible.
    • Employers cannot define employee eligibility in a way that discriminates in favor of highly compensated employees.
  • Qualified educational expenses include tuition, books, supplies, and equipment necessary for class.
    • Tools or supplies that the employee may keep after completing the course are not eligible.

Section 132: Education as a Working Condition Fringe Benefit

Section 132 of the IRC provides a way for employers to exclude job-related educational expenses that are not reimbursable under a Section 127 plan from an employee’s income for tax purposes.

In addition to current employees, these fringe benefits can also be offered to independent contractors, directors and partners, and volunteers.

There are important differences between these education-related fringe benefits and the educational assistance benefits defined by Section 127, including:

  • Unlike Section 127, there is no dollar limitation to education fringe benefits that adhere to Section 132.
  • Educational courses must be job-related under Section 132.
  • While tuition, books, supplies, and education-related equipment can be eligible under both sections, Section 132 also allows employers to cover the cost of employee meals, lodging, or transportation necessary to attend qualified courses.
  • Under Section 132, education fringe benefits are not subject to non-discrimination requirements.

(See the table below for a side-by-side comparison.)

As mentioned above, in order for courses to be eligible under Section 132, they must be job-related and maintain/improve the employee’s job skills, or be required by the employer or the law.

Courses are not eligible if they would be needed to meet the minimum job requirements of the employee’s existing role, or if they qualify the employee to enter a new trade or business.

FeatureSection 127Section 132
Written Plan RequiredYesNo
Undergraduate Courses CoveredYesYes
Graduate Courses CoveredYesYes
Courses Qualifying Employee for New Trade or Business CoveredYesNo
Courses Needed to Meet Minimum Job Requirements CoveredYesNo
Can Discriminate in Favor of Highly Compensated EmployeesNoYes
Dollar Limitation$5,250No
Definition of Employee Includes:
   Current EmployeesYesYes
   Family MembersNoNo
   Laid-Off EmployeesYesNo
   Employees Retired or on DisabilityYesNo
   Independent ContractorsNoYes
Educational Expenses Covered:
   TuitionYesYes
   Books, Supplies, EquipmentYesYes
   Tools or Supplies Employee May KeepNoNo
   Education Involving Sports, Games, HobbiesNo (unless specifically job related)No (unless specifically job related)
   Meals, Lodging or TransportationNoYes
Source: Based on IRS Fringe Benefit Guide, page 83.

Class Notes

Tuition reimbursement - reduce turnover and costs imageLet’s wrap up.

When it comes to attracting, retaining, and developing talent, every HR department is tested. Tax-advantaged tuition reimbursement programs are an important part of companies’ larger benefits plans.

Five important reasons why are:

  1. A tuition reimbursement program can help make a benefits package more competitive. Approximately half of today’s employers offer undergraduate and graduate educational assistance.
  2. Millennial employees have expressed greater interest in tuition programs. In fact, Gallup found that 45% of Millennials say they would change their job for tuition reimbursement benefits.
  3. With tuition reimbursement, employers can overcome workforce talent gaps by educating employees they already have. Only 11% of employers strongly agreed that graduating students have the skills and competencies that their businesses need.
  4. In addition to attracting top workers, tuition reimbursement benefits help employers reduce turnover. In the case of Cigna, every $1 spent on education assistance equaled $1.29 saved on talent management costs.
  5. Tuition reimbursement programs also give employers a way to reduce their tax burdens. Companies setting up a tuition program under IRC Section 127, for example, can deduct up to $5,250 per calendar year for each enrolled employee.

I hope that this review of tuition reimbursement programs has been… well, educational.

  • If you need help setting up a program that resonates with employees and takes full advantage of the above-mentioned benefits, connect with my one of my colleagues here at ConnectYourCare for assistance. They’re ready to help you make the grade.
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By |2018-09-11T16:17:51+00:00September 6th, 2018|Brokers, Employer Posts, Reimbursement Programs|
Disclaimer: ConnectYourCare does not provide tax or legal advice. This information is not intended and should not be taken as tax or legal advice. Any tax or legal information in this notice is merely a summary of ConnectYourCare’s understanding and interpretation of some of the current tax regulations and is not exhaustive. You should consult your tax advisor or legal counsel for advice and information concerning your particular situation before making any decisions.