Business owners now have a rich uncle who will help pay for their kids’ tuition, books and fees, and his name is Uncle Sam.
That’s what one local real estate developer discovered when his son decided to continue working for the family business while attending Duquesne Law School at night.
A 2001 amendment to Title 26, Section 127, of the federal tax code permanently includes post-graduate work — full- and part-time degree programs and single courses — in company tuition reimbursement plans. The inclusion specifically helps the children of business owners because Section 127 has always stipulated that an owner’s children must be least 21 years old and nondependents to qualify. Those conditions put most students in the post-graduate realm.
In addition, an owner’s children must be legitimate employees of the company, on payroll, with a job description, performing valuable services, and own less than 5 percent of the company. The developer’s son met the requirements, making him eligible to receive up to $5,250 annually in tax-free reimbursements.
But his dad has a few more decisions to weigh before offering the plan, which must be open to all employees and offer workers access to the same dollar amount. And while the company can take a deduction for every penny it reimburses, owners still may want to set a ceiling below the $5,250 maximum, based on the number of employees, to limit total annual exposure.
The plan can be amended, but the employer must give workers reasonable notice and a clear description of changes. Also, the IRS mandates that the plan cannot provide more than 5 percent of its total benefit to the owner or the owner’s dependents.
Plan administration is relatively inexpensive. Payroll services companies can develop and launch plans for between $500 and $1,000, leaving companies with the task of cutting and distributing reimbursement checks and filing paperwork. Compliance reporting involves updating a simple annual information form, essentially listing things like the number of employees eligible and participating, and the total payout.
The plan is easy on accountants, too. In April, the requirement to file a 5500 Series form was suspended, and a single itemized deduction on the company’s tax return is all that’s necessary now. David Hoffman is a tax partner with Pittsburgh-based accounting firm Trosch & Co. LLP, a full service accounting firm specializing in maximizing profits and reducing taxes for closely held businesses. He can be reached at [email protected] or (412) 261-4895.
