Thinking About Offering an Educational Assistance Program?

February 26, 2024

Here’s What You Need to Know.

An educational assistance program (EAP) can be an excellent way to attract and retain top talent for your Early Childhood Education center. It can also provide generous tax benefits for you and your employees. If you’re thinking about implementing an EAP at your childcare business, then you will want to read the following guide to qualified educational assistance programs.

What Is a Qualified Educational Assistance Program?

A qualified EAP is an employee benefit program in which an employer offers monetary assistance to their employees so that the employees can gain additional knowledge and improve their skill set. In order to be qualified for tax benefits from the IRS, an educational assistance program must meet specific requirements. As such, we recommend working with qualified professionals, including tax specialists, HR experts, and lawyers to build an IRS-approved educational assistance program.

A qualified EAP must meet the following requirements:

  • The employer may offer educational assistance for any form of instruction or training that improves or develops an individual’s abilities, such as professional certifications, undergraduate, or graduate degree programs. The employer may also offer student loan repayment assistance in addition to an educational assistance program.
  • The EAP must be laid out in a comprehensive written plan that is publicized to all employees and must not discriminate in any way, such as showing favor to highly-compensated employees.
  • No more than 5% of the total amount paid into an EAP by the employer may be provided for individuals who own 5% or more of the business, including a spouse or dependents.
  • Employees cannot take either tax credits or deductions for any amount excluded from their income as an educational assistance benefit.
  • If the employer pays more than $5,250 in educational assistance for an employee during the year, then the employee generally must pay taxes on any additional amount received. It is the employer’s responsibility to include this amount on the employee’s yearly W-2 Form as wages.

In order to meet IRS standards for your company EAP, additional requirements may apply. We encourage you to reach out to a knowledgeable tax professional to ensure compliance. Now we’ll take a look at the tax benefits of EAPs for both employers and employees.

Tax Advantages of Qualified Educational Assistance Programs for Employers

The major tax advantage of a qualified EAP for employers is the tax deduction it affords. Under Internal Revenue Code Section 127, employers can deduct up to $5,250 per employee per year for educational expenses paid through an EAP. That could potentially add up to huge tax savings for an employer!

Tax Advantages of Qualified Educational Assistance Programs for Employees

Employees, too, gain a major tax advantage when they participate in a qualified EAP. As noted above, educational assistance up to $5,250 per employee per year can be excluded from the employee’s income on Form W-2. Employees must, in general, pay taxes on any amount surpassing the annual $5,250 limit, but they may be able to exclude the excess funds if it is considered a working condition fringe benefit, which is a benefit that would be deductible as an employee business expense if the employee had paid it.

These allowances make it possible for employees to complete a degree program or other course of study 100% tax-free with their employer’s qualified educational assistance program.

What a sweet deal!

Take the First Step to Starting a Qualified Educational Assistance Program

If you’re interested in learning whether offering a qualified EAP at your childcare company could be the right choice for you and your employees, reach out to the tax experts at Honest Buck.

Get in touch with us today.

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