California Bill Would Grant Employee Tax Deduction for Tuition Benefits

Leah Shepherd By Leah Shepherd May 23, 2023

​California legislators have been considering a bill that would enhance the tax benefits to employees for educational benefits employers provide, but the bill may not pass this year.

AB 509 proposed allowing employees to deduct up to $5,250 from their state income taxes for educational assistance provided by their employers. The tax deduction would apply to any payment made by an employer on or after Jan. 1, 2024, and before Jan. 1, 2026, for a qualified education loan incurred by the employee for education of the employee. The employer's payment could be to the employee or to the lender. The education assistance can include money for books, supplies and equipment.

"The goal of this [tax] exclusion is to ensure California addresses the student debt crisis that many people in the state face," the legislation states.

"Employers would not receive an additional [state] tax deduction or credit for providing the benefits," said Colleen Hart, an attorney with Proskauer in Los Angeles.

It appears AB 509 stalled in the legislature's appropriations committee and likely won't be enacted this year, according to Michael Kalt, an attorney with Wilson Turner Kosmo in San Diego. There's political agreement on the need to address student loan debt; however, the state budget shortfall posed concerns, he noted.

Federal Taxes

Employees already can receive $5,250 in tuition reimbursement free from federal taxes, at least until Jan. 1, 2026. Any amount over $5,250 should be reported as taxable income by the employee. Likewise, up to $5,250 of tuition reimbursement per employee per year is tax-deductible for the employer.

The federal tax rule ensures that "employers can provide tax-excusable education even if that education may not necessarily meet a job-related test," said Mary Hevener, an attorney with Morgan Lewis in New York City.

After this federal tax exclusion passed, "the number of employers providing such tuition assistance has increased, and [that number] is expected to continue increasing," Kalt said.

For federal tax purposes, if the employer requires the employee to take the coursework or training, it's not considered a tuition benefit, and the employer has to pay for it, whether it's online or in person. The company also must pay the employee for the hours spent on that task, just like other work time. Educational courses involving sports, games or hobbies are excluded from the federal tax break.

Rising Tuition Costs

Concerns about the costs of earning a college degree are growing. At public four-year colleges, average tuition and fees were $9,400 in 2021, about 10 percent higher than they were in 2011. At private nonprofit four-year colleges, average tuition and fees were $37,600 in 2021, about 19 percent higher than they were in 2011. At private for-profit four-year colleges, average tuition and fees were $18,200 in 2021, about 1 percent higher than they were in 2011, according to the National Center for Education Statistics in Washington, D.C.

Forty-eight percent of employers offered undergraduate or graduate tuition assistance in 2022, and 7  percent offered student loan repayment assistance, according to SHRM Research. The average maximum education assistance was $5,070 in 2022.

Tuition assistance and student loan repayment programs can help employers boost recruitment, retention and productivity, especially in a tight labor market, which is affecting some industries today.

"Student loan pressures may lead to both increased costs for turnover, as employees seek higher paying jobs to reduce the burden of payments, and reduced productivity and efficiency due to employees' financial stress," Hart said. "Companies with a significant percentage of employees with student loans in competitive job markets may be more likely to offer student loan payments as a benefit."

In their written benefit policies, employers should carefully outline the eligibility requirements, the class of employees eligible for the benefit, the amounts of benefit available, and the types of educational programs and expenses that qualify under the program. Some employers require recipients to pay back the money if they leave the company within a year or two of receiving the benefit. They should make sure that any repayment provisions don't violate state laws limiting the use of noncompete agreements, according to recent analysis from Bradley Arant Boult Cummings.



Hire the best HR talent or advance your own career.

Break California’s intricate labor code.

Successfully interpret and apply California employment law to your organization’s people practices.

Successfully interpret and apply California employment law to your organization’s people practices.



HR Daily Newsletter

News, trends and analysis, as well as breaking news alerts, to help HR professionals do their jobs better each business day.