Employee Tuition Reimbursement: How It Works

From a financial standpoint, most would consider a college degree a necessary evil. Whether students pursuing one can actually afford it, it's the piece of paper that lands most of them a slot on your calendar.

And, for those who want to go back to school to add new skills, certifications, or a Master's degree; it's a game of wondering how much student debt they'll have to pile on with their existing one.

Tuition reimbursement benefits save your employees money. You can use them to build a more engaged and productive workforce in the long run.

What is employee tuition reimbursement?

Employee tuition reimbursement is a company-sponsored benefit that covers some or all of the costs associated with an employee's college coursework. In a reimbursement program, the employee pays for their courses upfront, and the employer pays back a portion or the full amount of that cost upon completion.

If you're wondering how it works, it's simple:

  1. You decide the approved programs (or give your employees free rein).
  2. They pay their tuition at the beginning of the term.
  3. They stay with your company for the course duration.
  4. They submit their grades and receipts.
  5. You process the reimbursement through payroll.

SHRM's 2022 employee benefits survey found that nearly half (48%) of companies offer tuition reimbursement for graduate and/or undergraduate programs. A separate report from Willis Tower Watson found that 80% of large companies provide it as part of their benefits package.

Tuition assistance programs vs. tuition reimbursement programs

You know how every square is a rectangle, but not every rectangle is a square? In this case, tuition assistance is the rectangle, and tuition reimbursement is the square.

Tuition assistance refers to any type of employer-provided financial aid — for example, scholarships or grants under IRC Section 117(c), which include college tuition and eligible expenses (e.g., books). Unlike a reimbursement program, the student usually doesn't need to pay anything upfront.

Employer tuition reimbursement could be part of a larger tuition assistance program, but it's much more specific. It only reimburses the student for money they've already spent on tuition. This means it's repaid ~4 months after the fact and doesn't cover other expenses like books or transportation costs.

What's included in a tuition reimbursement program?

Typically, tuition reimbursement programs have certain criteria and limits that dictate what courses or degrees are eligible for reimbursement. These will vary depending on your company and its budget.

Common inclusions for tuition reimbursement programs include:

  • Undergraduate degrees (e.g., Bachelor's)
  • Graduate degrees (e.g., Master's)
  • Online undergrad and graduate online degree programs
  • Professional certifications
  • Educational and vocational courses
  • Job-related courses and education programs
  • Leadership or management development programs

In many programs, employees can choose from any accredited institution, but some tuition assistance packages only cover certain schools or fields of study. We see this more often at enterprise companies, which sometimes have partnerships with specific universities or online programs.

For equity and inclusivity purposes, it's in your best interest to let employees choose the institutions that fit their needs best (even if they aren't your partners).

Why offer tuition reimbursement programs?

Simply put, investing in your employees' education means they'll stay longer, do better work, and contribute more to your company.

While there isn't necessarily a shortage of employees, there is a shortage of skilled employees. The world's companies collectively know this — 87% say they're either already aware of their current skills gap or know they'll have one in the next few years.

According to Amazon and Gallup's Upskilling in America study...

  • 70% of employees would be "extremely likely" to switch to a new job if it offered upskilling opportunities
  • For young adults entering the workforce, it's more important than retirement, sick leave, vacation, and parental leave
  • 71% of those who completed an upskilling program reported a positive impact on job satisfaction and productivity
  • On a macro level, the US economy could add $651 billion annually if employees received new skills development

And, for what it's worth, educational assistance programs are almost always conditional — employment status, length of time with the company, and continuous employment throughout the duration of their curriculum are all prerequisites. So, by the time employees qualify, they've almost certainly delivered value to your company 10x their tuition costs.

Really, it's more of an investment than an expense. And you're still well inside the green after offering it.

Oh yeah...employers get tax breaks, too.

Important considerations for your tuition reimbursement program

Reimbursing your employees' education expenses is easy. You can use a stipend/reimbursement platform like Compt to reimburse through payroll.

But, offering tuition reimbursement requires a little more thinking than the rest of your employee benefits package.

Tax implications

Just like student loan stipends and loan repayment assistance, your tuition reimbursement program is not taxable, so long as you meet the IRS requirements.

  • Until December 31, 2025, employers can offer each employee $5,250 of tax-free educational assistance each year.
  • Any education or training benefits, — including tuition reimbursement — that exceed $5,250 in a calendar year are subject to income tax.
  • $5,250 represents a cumulative total. Let's say your employee already received a total of $2,000 in stipends and loan assistance this year. You can only reimburse up to $3,250 tax-free.
  • After December 31, 2025, you won't receive the same tax break.
  • If your employees' educational expenses are a working condition and considered a 'reasonable' business expense, you can deduct education costs as ordinary business expenses (even after December 2025). Examples include continuing education courses or training that improve or maintain the skills employees can't do the job without.

Compt is 100% tax-compliant and finance-team-friendly, so there are no back-office headaches (and the office won't be sent into a frenzy if you're audited).

Minimum requirements

This will vary from company to company. You'll have to work with HR, compliance, finance, and the exec board to figure out what works best for your company.

In general, though, you want tuition reimbursement benefits to be conditional. You can't predict the future. If employees have to leave before their curriculum is over (or worse, you have to let them go), you're in a tough position if you've already paid thousands for their tuition.

To protect themselves and their employees, companies typically enter a contract with their qualifying employees and require the following:

  • The employee must have been with the company for at least 6 months (or a year) in full-time status.
  • They must maintain full-time employment throughout the course's duration.
  • If they switch to part-time or leave entirely, you do not need to reimburse them.
  • Coursework must be relevant to the employee's current position or a future role within your company.

A lot of the time, employers take the concept of using perks to increase retention to the next level by tying tuition reimbursement to longer-term employment. For example, an employee who leaves the company less than a year after completing their certification, course, or degree program would be liable for repaying the employer's full tuition investment.

Since this few-thousand-dollar investment on your end requires a significant time investment on theirs, it's your responsibility as an employer to relay these conditions to your employees.

Give them all the information they need to assess the pros and cons of accepting your offer, and give them time to privately evaluate their own goals and future with your company.

Approved courses

Again, you aren't really offering an inclusive employee benefit if access to education opportunities is restricted.

While it might be easier for your company to offer tuition reimbursement through a partner school (for example, Starbucks and ASU's College Achievement Plan), restricting your employees to a specific course or program severely limits their options for growth.

Your employee will have little choice over the content, format, duration, and cost of their education...and they may not even be interested in a degree from that particular institution.

Here's our take:

  • There's nothing wrong with promoting certain programs or offering additional incentives. You may have a partner school that can provide extra benefits for your employees, but don't restrict them from seeking programs elsewhere.
  • If you're worried about the cost of attendance at other schools, put a cap on what you'll reimburse.
  • If budget isn't an issue and you want to make tuition reimbursement as accessible as possible, offer employees a stipend. This is a more versatile option that gives them the freedom to choose from various institutions and programs that fit their individual learning style and goals.

Compt makes it easy to set up a tuition reimbursement stipend.

You also need to standardize your eligibility requirements across all employees. Besides employment status and length of time they've been with the company, two employees in the same role should have the same opportunities and access to your program.

Other educational assistance benefits

Besides tuition reimbursement, you have other options to consider that may fit your company's needs better. Some alternatives include:

  • Student loan repayment programs Under this model, employers contribute monthly to their employees' student loan payment or disburse an annual lump sum.
  • Student loan stipends — Similar to a tuition reimbursement stipend, employers provide employees with funding for their student loans.
  • Company scholarship programs — You may offer scholarships for employees and their family members to pursue secondary education.
  • Loan refinancing and consolidation — Instead of paying off their loans as is, employees can work with your preferred vendors to consolidate their loans into one payment plan or refinance the interest rate (at no cost to them).

With Compt, employees can earn their degree or certification from a program of their choice. All you have to do is reimburse it through payroll. Easy. Automated. Tax-compliant. See how it works.

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