Direct Contracting: A New Approach to Education Benefits

Design educational partnerships to achieve the employer’s goals and objectives

By Joanne Sammer Dec 2, 2014
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As some large U.S. companies announce partnerships with educational institutions to give their employees access to free or discounted degree programs, other employers are watching closely.

The details of these offerings vary. For example, in 2014—with much fanfare—Starbucks entered into a partnership with Arizona State University (ASU), which offers its online degree program to Starbucks workers at a steeply discounted rate (see the SHRM Online article Starbucks Helps Employees Earn Online Degrees).

A diverse set of companies—including Anthem Blue Cross/Blue Shield, McDonalds, ConAgra and Gulf Oil—are partnering with New Hampshire-based College for America’s online degree program, which caps its fees at $2,500 per year, per student.

“This is so new, employers may wait and see how it plays out for the pioneers,” said Carol Sladek, work/life consulting leader at Aon Hewitt. “They will want to see what percentage of employees are signing up for these programs, how much traction there is, and the cost/benefit ratio involved.”

Beyond Tuition Reimbursement

This is a far cry from legacy education benefit programs that tend to be structured around the tax limitations for these benefits. In fact, it may be those very limitations that are driving employers to seek new options. Under current tax law, employers can offer up to $5,250 in educational assistance benefits annually for tuition, books and supplies. “In today’s world, $5,250 isn’t a lot of money for education,” said Eric Chen, associate professor of business administration at the University of Saint Joseph in West Hartford, Conn.

Moreover, any amount paid by the employer in excess of $5,250 for an employee’s educational benefits is taxable to the employee. For example, “if an employer paid $10,000 for an employee’s educational benefits in a given year, the employee would normally be taxed on $4,750 of income”—$10,000 minus $5,250—said Chen. “Keep in mind that the employee did not receive this income in cash, and now has to pay taxes to boot.” By negotiating discounts and offering free tuition in some cases, employers can offer a more valuable benefit.

Although companies offering these benefits are paying for a larger portion of the education bill for employees, the tradeoff is that employees have limited choices if they want to take advantage of these programs. Under a traditional tuition reimbursement benefit, “employees have a lot more flexibility in choosing where to go, what classes to take and setting the pace,” said Sladek.

The Time Is Ripe

Partnerships and resulting programs must be designed to achieve the employer’s goals and objectives. “Any employer looking to form partnerships directly with schools should first decide internally what their overall objective is,” said Jay Titus, senior director of academic services at EdAssist, which provides tuition assistance management services. “Is it to drive savings? Ensure learning outcomes? Close skill gaps?” He urged employers to identify programs that meet the specific needs of their organization, and take into account accreditation, program modality (online, classroom-based or both), cost, and learning outcomes when choosing partners.

“Employers are looking for a very specific offering and a very specific solution,” said Sladek. For example, “organizations may look at offering only certain degrees that are applicable specifically to their business, such as a business management degree.”

The fact that more and more employers are announcing these types of programs right now is likely no accident. “This may indeed be the right time to strike these kinds of deals,” said Chen. “Enrollments are down for many educational institutions and tuition discounting is creeping up to an all-time high.”

Evaluating Partner Institutions

Among the steps employers should take when selecting an educational partner are the following:

Identify potential partner institutions.

Many higher-education institutions are actively pursuing these types of arrangements and often have a corporate partnerships office that employers can contact for more information. Not every institution will be a good partner for an employer, so “consider each institution’s reputation, programs offered, faculty and job effectiveness outcomes,” said Chen.

Access to classes is another consideration. For classroom-based programs, employees may not be interested in or be able to fulfill attendance requirements if the campus is not close enough to the workplace. Therefore, employers operating in multiple or remote locations can focus on partnerships that offer only online courses or a mix of in-person and online learning.

Conduct due diligence.

Investigate whether a potential partner is going to be on sound footing for the long run. Employers that don’t wish to conduct their own due diligence can hire a vendor to do it for them. Also, make sure you’re comfortable with what the college or university wants in exchange for offering the discount, and that it’s clear how a potential partner would use the affiliation for its own promotional purposes.

Agree to the terms.

“Most schools ask employers to sign a memorandum of understanding that outlines the terms under which the discount will be given,” said Titus. This could include guaranteeing that the educational institution will have certain marketing opportunities with employees, including onsite visits, and that the employer will provide a minimum number of employee enrollments. “Employers need to consider what their commitment level will be and how much exposure they want to give to one school over others,” said Titus.

Larger employers naturally have more leverage in such negotiations because of the number of potential students they can send to an educational institution. However, “this should not discourage small employers from approaching educational institutions to create partnerships,” said Chen. “Small employers can also band together in order to negotiate from a position of strength.”

In some cases, these agreements provide both tuition discounts as well as customized programs based on the employer’s goals and objectives. “This can make the programming more relevant to the employee base,” said Titus. Even so, employers have literally thousands of options when it comes to choosing partners, so make sure the curriculum and learning outcomes align with the strategic learning needs of your organization.

Joanne Sammer is a New Jersey-based freelance writer.

Related SHRM Articles

Starbucks Helps Employees Earn Online Degrees, SHRM Online Benefits, June 2014

Rejuvenating Tuition Reimbursement Programs, HR Magazine, June 2014

How's That Tuition Assistance Program Working for You?, SHRM Online Organizational and Employee Development, January 2012

Smarter Tuition-Assistance Programs: Advice from Academe, SHRM Online Benefits, November 2007

Related External Articles

The Genius of Starbucks' New Employee Tuition Program, Vox.com, April 2015

Starbucks Scholarships and Other Companies that Pay for College, Credit Card Insider, October 2014

Related SHRM Resources

Designing and Managing Educational Assistance Programs, SHRM toolkit

Educational Assistance Policy: Job-Relatedness Requirement, SHRM sample policy

Educational Assistance Policy: Benefit Amount Varies, SHRM sample policy

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