Helping Workers Pay College Costs

Company-sponsored scholarships can help bridge higher educations affordability gap for employees college-bound dependents.

When Devan Bremm found out she had just been awarded a $2,500 college scholarship from her mother’s employer, Humana Inc., she was thrilled—and relieved. She was in her junior year, working toward a degree in elementary education, and had been paying her own way fully since sophomore year.

Devan’s mother was pleased, too. “My husband is a paraplegic and is on disability, which makes me the main breadwinner,” says Mary Bremm, a financial analyst for the Louisville-based health benefits company. “We couldn’t afford to help Devan after that first year.”

About 27 percent of companies provide this type of employee benefit, up from approximately 20 percent through the previous four years, according to the 2005 Benefits Survey Report by the Society for Human Resource Management (SHRM). Moreover, 50 percent of all companies with more than 500 employees offer scholarships for employees’ dependents.

A company-sponsored scholarship program involves a host of details—from choosing its tax structure to deciding who’s eligible and determining the size of the company-supported awards. Although administration of scholarship programs is usually turned over to experienced outside firms, the sponsoring company’s HR professionals need to know the fundamentals of establishing and maintaining an effective, legal program. In turn, they should be able to see the positive results within their workforce.

Building Bonds

Such programs, experts say, foster good employee relations, as the Humana program has done with Mary Bremm, and show that sponsoring companies recognize employees’ concerns about meeting the rising costs of college education for their children. (See “The Cost of College”.)

They can even help boost employee recruitment and retention. Humana’s program, in which the company has invested more than $6.5 million since starting it in 1991, helps attract “bright, young, dynamic associates to our organization,” says Virginia Judd, executive director of the Humana Foundation, which oversees the program.

Another company that sees recruitment pluses in its scholarship program is Franciscan Health Systems (FHS), a nonprofit health care provider in Tacoma, Wash. FHS targets its awards primarily to employees’ children who are interested in entering the health care field, although it also awards scholarships for study in other areas.

“We are always focusing on workplace development,” says Lisa Morten, PHR, director of employment at FHS. She suggests that if a scholarship program attracts dedicated health workers and thereby reduces turnover, it could help reduce expenses. For example, she says, replacing a registered nurse in the operating room can cost more than $80,000, “so if you are looking at a $100,000 budget for your scholarship program, it easily pays for itself.”

The program is one reason that registered nurse Debra Spaulding intends to stay on at St. Joseph Medical Center, an FHS hospital. Her daughter, Rebeca, a sophomore studying nursing at Pacific Lutheran University, has received two annual awards of $2,000 each from FHS. The school matches outside scholarships up to $1,000, so each award turned into $3,000. “By the time Becky is finished with school,” says Spaulding, “this will have been about a $10,000 benefit to our family.”

Spaulding has one more child who will be eligible to apply for scholarships, so she sees herself staying at her job for some time. What’s more, she says, Rebeca feels connected to FHS, plans to intern with the company and would like to work there after she graduates.

Tax-Free or Not Tax-Free?

From the outset, employers deciding whether to establish a dependent scholarship program must consider the tax questions. Will the benefit be taxable or tax-free to employees? What will be the tax implications for the company?

The simpler arrangement for employers is to let the awards be taxable, experts note; it gives a company leeway in shaping its program’s criteria and eligibility standards. Each scholarship award is then treated as additional compensation and reported on the employee’s W-2.

On the other hand, an employer who decides to offer awards tax-free, as do Humana and FHS, has to take into account a number of rules for setting up such a benefit.

The first step is to have a separate, private foundation handle the process, says attorney Antoinette M. Pilzner, who specializes in employee benefits and compensation in the Ann Arbor, Mich., office of the Butzel Long law firm. Companies may set up their own independent legal entity, she explains, or they may use an established foundation specializing in scholarship programs. It must have an IRS 501(c)(3) designation, which means, among other things, that contributions to the foundation or entity are tax-deductible to the donor, up to certain limits.

Pilzner cites a number of additional requirements for tax-free status:

• The group of employees and their children must be diverse enough to constitute a “charitable class.” A company consisting of five professional-level employees would probably not qualify.
• The selection committee has to be completely independent of the employer and its foundation.
• Eligibility for a scholarship cannot be related to the employee’s position or length of service, provided the employee has been with the company for at least three years.
• Selection of recipients has to be based solely on objective standards, unrelated to employment or to the employer’s line of business.
• The course of study for the grant cannot be limited.
• There are limits on the number of grants that can be awarded. The sponsoring company can decide which of two types of limits will apply to the scholarship program. Most employers with tax-free programs choose the option that limits the number of grants to 25 percent of the number of eligible students who applied for the grants. Under the other limit option, the number of awards cannot exceed 10 percent of the total number of employees’ children who are eligible that year. The latter option is chosen less often because it requires the company to determine the number of all employees’ eligible children, which can be a daunting task even in a mid-size company.
• The employer cannot use the scholarship program as an inducement to employment or continuing employment.

In fact, that rule against using a scholarship program as an inducement to join or stay with a company is one of the main reasons employers decline to offer scholarships tax-free, Pilzner says. With the rule in force, she explains, a scholarship for more than one year could not be denied or rescinded if the employee—the parent of the student—leaves the company anytime after the award has been granted. Moreover, a scholarship recipient whose parent had left the company could not be disqualified from having the scholarship renewed. “Most employers,” she notes, “don’t particularly want to provide benefits for someone no longer in their employment.”

Enlisting a Third Party

Even companies that go with the less complex structure of a taxable program should consider using a third-party administrator, experts say, particularly to show the employer’s hands-off approach to selecting recipients and to ensure the program’s integrity. “It’s important to have the perception of fairness with the award,” says FHS’s Morten. Both FHS and Humana use Minneapolis-based Scholarship America as their administrator.

Internally managed programs can lead to criticism about the selection process because of either the perception or the reality of favoritism, notes Sandra Lee, president of the Center for Scholarship Administration, a firm in Taylors, S.C., that administers 125 programs.

Another reason to consider a third-party administrator, experts say, is that it allows the employer to rely on outside experts to handle the details—and there are plenty: setting up operating procedures; providing applications; making certain all materials have been turned in; reporting which students met the eligibility requirements and ranking them; providing a review committee; notifying recipients; working with colleges to pay the scholarships; tracking transcripts for renewable scholarships; and contacting unsuccessful candidates.

Some vendors also provide the sponsoring company with promotional pamphlets as well as other materials for announcing the winners in company newsletters and local news media. “We don’t have the resources or expertise in this office to handle all of that,” says Humana’s Judd, “especially when it comes to the selection of the scholarship recipient. They specialize in this work.”

Fees charged by third-party administrators are usually based on several factors, including the number of scholarships, the number of applicants and the total amount of the awards. Lee says the Center for Scholarship Administration charges a $500 setup fee plus a percentage of the total amount of scholarship funds awarded, ranging from 7 percent to about 18 percent. FHS pays about $5,600 for administrative fees, while Humana, which gives up to 75 scholarships annually, pays administrative fees equal to about 4.5 percent of the scholarship funds that it awards.

The scholarship program at San Jose, Calif.-based Knight Ridder, the second-largest newspaper publisher in the United States, is overseen by the National Merit Scholarship Corp. in Evanston, Ill. Knight Ridder spokeswoman Elaine Detweiler says the company pays a set donation of $90 to $250 per scholarship; the fee declines as the number of scholarships awarded goes up. The fee on average is $150, she says.

A sponsoring company that elects to have a charitable organization administer the program can claim a charitable deduction each year for the entire sum—scholarship funds and administrative fees—given to the organization.

In almost all instances, scholarship money goes directly to the college or university, not to the employee or the student. Nonetheless, if the program is not set up as a tax-free arrangement, the value of the award is still considered taxable income to the employee.

How Much? How Long?

Companies often struggle with how much to award. Scholarship administrator Lee finds that her programs generally run $2,500 to $3,000, although some employers cap their awards at $500. Marilyn Rundell, vice president of Scholarship Management Services, a program of Scholarship America, sees awards in the range of $1,500 to $2,000.

Humana offers $2,500 scholarships for full-time employees and $1,250 for part-timers. FHS provides scholarships running from $1,000 to $2,000. Students who enroll in programs that train them for specific health fields such as nursing, pharmacy or physical therapy receive the higher amounts. “But we also need people in related fields, such as accountants and HR people,” says FHS benefits manager Jerri Bernard, PHR, “so we will provide scholarships at the lower end for these areas.”

FHS also offers forgivable loans to students who don’t receive scholarships but are highly qualified. The loans, from $750 to $1,500, are forgiven if the employee stays with the company for at least two years after the loan is provided; half of the loan is erased after the first year.

Finally, FHS, like about half of the companies that offer scholarships, includes financial need in its criteria. Because some applicants lose out on scholarships for that reason alone, FHS also awards $500 honoraria to students who meet the other qualifications. They are, Bernard says, “academic record, demonstrated leadership, participation in school and community activities, honors, work experience, statement of goals and aspirations, unusual personal family circumstances, and an outside appraisal”—a teacher’s or counselor’s recommendation.

Most companies make their awards renewable up to four years. Some scholarships are automatically renewable; others require a new application each year. Requirements for continuing a scholarship usually include a certain grade point average and full-time status. Some companies, recognizing that certain courses of study require five years to complete, are willing to continue an award through the fifth year.

Setting the Criteria

Companies usually open a scholarship program to all employees, although some may reduce awards for part-time employees’ dependents. Some companies cut off eligibility at a particular job level, such as director, or at a particular income level, such as $75,000 or $125,000. Most employers also require that employees have worked at the company for one to three years.

Knight Ridder, which has employees in 28 markets, sets no time requirement for employees, says Gail Yoshimoto Shih, director of employment/talent, but the company’s eligibility requirements are a bit different from most. For example, only National Merit finalists are eligible for the company’s scholarships.

To become finalists, students must take the PSAT during their junior year of high school, competing with all students nationwide who are taking the test that year. Finalists are chosen based on their scores, academic record, school recommendation and other criteria.

If a finalist is the dependent of a Knight Ridder employee, the company will provide a stipend ranging from $500 to $2,000 per year for up to four years of college.

A company can set practically any criteria for student applicants. The most common eligibility requirements are academic record, test scores, school and community service, recommendations from teachers or counselors, and an essay on the student’s goals. The applicant also usually must be a full-time student at an accredited college or university, or must be accepted for the coming academic year.

Larger companies with multiple locations may distribute their awards proportionately throughout the organization. Humana, for example, operates in four geographic regions, and the percentage of winners in each region reflects the percentage of eligible applications from that region.

In establishing such criteria, proceed carefully and think long term, Rundell advises. Once the qualifications are on the record, it is difficult to change them without upsetting employees. And plan on offering a scholarship program for the long haul, she adds, because employees with young children—or who expect to have children later on—will count on such a benefit being there for them when they need it.

Nancy Hatch Woodward is a freelance writer based in Tennessee and a frequent contributor to HR Magazine .