Learn about the pros and cons of reimbursing your employees for tuition to determine if this type of program is right for your business.
To attract and retain top talent, employers need to invest in their employees. You can do this by outlining clear career paths, providing additional training courses, and creating employee development opportunities. Another benefit that many employers often forget about is tuition reimbursement programs. This benefit, when utilized, is worth the investment and can help your team flourish.
What is tuition reimbursement?
Tuition reimbursement, also known as tuition assistance, is an employer-funded stipend that an employee can use to cover education-related expenses like books and fees as well as tuition. Employees typically pay out of pocket for education costs and then reimburse themselves through the stipend for qualifying expenses. The specific education assistance that a tuition reimbursement program covers will depend on the goals of the employer and how they design the program to meet those goals.
For example, Anthony Babbitt, business strategist and executive mentor at Babbitt Consulting, listed three goals an employer may have for a tuition reimbursement program:
- You're trying to retain qualified staff in the early stages of their careers.
- You're trying to stand out from similar businesses by offering a rarely used employee benefit.
- You're recruiting for skills that are rare in your area of operations.
Once you define your goals, you can create a tuition reimbursement program to match. The program's specific requirements and qualifications should support those goals. For example, if your goal is to have employees with a rare set of skills, you might limit the education reimbursement plan to only cover courses for those skills.
How do tuition reimbursement programs work?
Since every tuition reimbursement program is different, you must work with your human resources department, as well as accounting and legal representatives, to determine the eligibility and expense requirements for your business's tuition reimbursement or educational assistance program.
Jim Pendergast, senior vice president of altLINE (a division of The Southern Bank Company), said that after you create a tuition assistance program, you and your other company leaders should designate the reimbursement sums, and then ensure eligible employees have intuitive ways to apply for the benefit and submit documents to receive the stipends. An employee typically pays for their education expenses upfront and then reimburses themselves for applicable expenses with the stipend.
Although some companies offer their tuition reimbursement programs to every employee, many choose to set eligibility requirements. This can make the benefit more desirable or exclusive for the employee, as well as more affordable for the employer.
"[Employers] may decide to cap the number of annual participants or make it an earned benefit, something that's available to employees who've been with the organization for, say, two years," Pendergast told business.com.
For an employee to qualify for reimbursement, some companies require proof of pre-registration, while others require proof of attendance or an invoice and a school transcript (for example, they may require employees to earn a "B" or higher to qualify).
Some employers also have employees agree to remain employed with them for a set period after they complete their coursework (e.g., three months, one year, five years). This deal could help you reduce employee turnover and ensure your company reaps the rewards of its investment.
You might want to set an annual reimbursement limit – often up to $5,250 per employee per year, since this is the limit the IRS sets for tax deductions. You may also limit qualifying expenses to a specific list of accredited institutions or four-year schools, and determine which specific courses or items are eligible for reimbursement.
"Some companies only cover pre-qualified, job-related educational expenses," Babbitt said. "For instance, a manufacturing company may only cover welding classes for plant workers, but accounting classes for office workers. I have worked with medical practices that covered nursing-related courses for the nursing staff."
Pros of offering tuition reimbursement
Tuition reimbursement may seem like a costly employee benefit to offer, but it can be advantageous for both you and your employees.
Offering tuition reimbursement can be a great way to build your company's reputation. It shows that you are dedicated to helping your employees learn and grow. Even if you have a minimum-wage team that doesn't need advanced skills, you can offer education assistance with wide eligibility parameters for your employees to obtain a higher education.
"For instance, Walmart and McDonald's have tuition reimbursement plans, which offer them good public relations stories when hiring minimum-wage workers," Babbitt said. "They tend to tout these programs as a way for their employees to improve their situation in life, and the tuition reimbursement is not usually tied to the workers' jobs."
A key benefit that most employees look for in a job is the opportunity for personal growth and career advancement. By including a tuition reimbursement program in your employee benefits package, you can set yourself apart from your competitors and enhance your recruitment strategy.
In addition to attracting top talent, tuition assistance programs can help you train and retain high-quality staff. Employees who take advantage of these programs are likely to feel a sense of loyalty to your company and advance within your organization instead of seeking career growth elsewhere.
"I have several small medical practices that have helped their top nurses move from MA to LPN to RN," Babbitt said. "Other businesses have helped bookkeepers become CPAs. Tuition reimbursement plans allow employers to attract and retain qualified, hardworking people while meeting the needs of their unique business."
Tuition assistance can help your employees improve their skills, which is beneficial to both you and them. For example, if you are having a hard time finding a qualified candidate with a specific set of skills, you can offer tuition reimbursement to a new hire as a way for them to gain those skills. Additionally, since these programs often incentivize industry-relevant advanced degrees and certificates, it allows you to grow your workforce into top-tier, accredited professionals.
Cons of offering tuition reimbursement
Although there are several benefits to offering tuition assistance, you should be aware of a few potential drawbacks.
Cost and budgeting
A clear obstacle to offering tuition assistance is the cost – which is why many employers set annual or lifetime limits for how much money they can reimburse an employee. Although most employees don't take advantage of these programs, it could be costly if all your employees decided to utilize it at the same time. This sort of uncertainty makes it hard to budget and is not always accounted for in labor cost calculations.
"Even when they are included [within labor cost calculations], these costs can vary wildly, which makes them hard to budget for, especially in a small business," Babbitt said. "For instance, a small business may have one person take advantage of the program for a year, followed by no one using it for 10 years. How should such a budget be set?"
Unclear or changing policies
If your tuition reimbursement plan is poorly managed or has unclear guidelines, it can cause confusion and frustration among employees.
"A program without clear qualifying parameters or long reimbursement timelines can feel a bit like dangling-carrot gimmick to your employees," Pendergast said. "If few people actually positively benefit from the program, you have to wonder, what's the point?"
Similarly, you could cause resentment by changing the guidelines when employees are trying to use the benefit. For example, if you have an influx of employees using the benefit, you may want to cap participation to reduce costs, which could frustrate those who no longer qualify.
Employee loyalty or disloyalty
As previously stated, when an employee uses a tuition assistance program, they tend to be more loyal to their company. This can be a great thing, but it can have a negative impact on productivity and company morale if the employee is actually unhappy and only staying out of a sense of obligation. If this is the case, it is important to work with that employee to improve their job satisfaction.
Conversely, many employers worry about employees taking advantage of tuition reimbursement programs and then leaving the company. While this is a possible outcome, it's not as common as you might think, and it can be offset by the benefits you receive while the employee is taking their courses.
"Yes, some employees will leave, but usually only after graduation," Babbitt said. "While they are in school, they are applying what they know to their job, and this benefits an organization. These employees are exposed to new ideas and concepts and will apply them to their duties. The benefits received are typically greater than the costs associated with losing someone."
If you are worried about disloyalty, you could have employees agree to a work-commitment period after graduation; they would have to repay the amounts you reimbursed them if they leave before this period ends.
Is tuition reimbursement a tax benefit?
Yes – if documented properly, employers can deduct up to $5,250 in reimbursements (per employee) from their own taxes each year. Employees are also exempt from federal tax income on reimbursements up to $5,250. Any amount paid over these limits may be considered fringe benefits and is taxable income for both parties.
"It's worth noting there is an exception for education reimbursements over $5,250 if it's an IRS-qualified working condition fringe benefit," Pendergast said. "That's basically just a fancy way of saying the education costs accrued are necessary for the employee to conduct their role's regular business activities or services. There are some technicalities here, though, so ensure your organization's HR and finance teams do their research."
When creating a tuition reimbursement program, you should also seek legal guidance to comply with federal, state and local labor laws.