Tuition reimbursement is a popular benefit in which employers pay all or part of an employee’s tuition for college courses or degree programs. Educational benefits taking the form of scholarships and grants are tax-exempt benefits under Section 117 of the Internal Revenue Code if the employee is a degree candidate and the course work is job related. Tuition reimbursements are classified as a working condition fringe benefit under Section 132 of the code and do count as gross income if the education maintains or improves job skills. In addition, educational assistance programs (EAPs), as defined under Section 127, permit companies to provide up to $5,250 toward educational expenses without employees incurring tax liability. An EAP requires a written plan that is open to everyone but does not require the employee to be enrolled in a degree program or the content to be job related.
Surveys of both students and firms indicate that educational assistance and tuition reimbursement programs are widespread. A 1996 national survey found that 75 percent of U.S. establishments with more than 20 employees and almost all large employers offer some type of tuition reimbursement benefit. Other estimates come from surveys conducted by professional associations. These range from 67 percent of members of the Society for Human Resource Management (SHRM), who offered graduate assistance in 2005 to 89 percent of members in the International Foundation of Employee Benefit Plans (IFEBP), who report having at least one education benefit program. Surveys of students also find extensive use of employer tuition aid. A National Center for Educational Statistics (NCES) survey in 1996 found that 6 percent of all undergraduates and 13 percent of all graduate students received financial aid from their employers. For students who identified themselves as working, 25 percent of undergraduates and 42 percent of graduate students received employer aid. Tuition aid was strongly related to course of study; approximately one-third of all undergraduate students enrolled in business, engineering, and computer science programs received financial aid from their employers.
Although tuition reimbursement programs are common and nearly universal among large employers, the costs and structure of the programs vary widely. A 1998 Hewitt Associates survey of 460 tuition reimbursement programs found that 77 percent reimbursed educational expenses (such as books and fees) in addition to tuition and that 14 percent placed no limits on the amount of tuition that could be reimbursed. A 2000 IFEBP survey found that the most common restrictions placed on tuition reimbursement programs were reimbursements contingent on grades, annual dollar limits, and length of service requirements before an employee becomes eligible to participate.
From the firm’s perspective, tuition reimbursement programs are appealing, since they are widely seen as a good benefit by employees regardless of whether they actually take advantage of the programs. For example, Fortune magazine uses educational benefits in their assessment of the “Best Places to Work.” In addition, costs are only incurred when employees actually enroll, and typically a much smaller portion of those employees who are eligible actually use the programs. Although there are no broad-based estimates of program participation, an IFEBP survey of 26 programs found that slightly more than half had participation rates of less than 5 percent and three-quarters reported less than 10 percent of employees. A RAND study of tuition assistance in the military found participation rates between 9 percent and 13 percent.
Company expenditures on tuition reimbursement follow the prevailing notion in the popular business press that employee development helps in recruiting and retaining quality employees. This substantial investment in employee education raises interesting questions, however, because it appears to contradict classic human capital theory as originally formulated by Gary Becker and others. This is because college classes develop “general” skills that are broadly marketable and should therefore make employees more likely to turn over. Human capital theory predicts that a firm would only invest in general skills if an employee were willing to bear the cost by accepting lower wages before or during the training. Since studies have shown that employees do not receive lower wages during training, a question is raised as to whether college educations create job opportunities and lead to turnover.
Of all the forms of company-sponsored development, college courses covered by tuition reimbursement are the most likely to be seen by employees as providing marketable skills because of the broad content and qualifications that they offer. Some organizations have recognized this potential for turnover and instituted policies that require the employee to stay for a certain length of time or repay the cost of the classes. However, the proportion of firms that use contractual “handcuffs” to keep employees is still relatively low, with estimates ranging from 16 percent to 23 percent. This leaves open the question of why employers would provide educational assistance when the new skills would theoretically create an incentive for employees to leave.
Two recent studies have examined this question specifically and found that retention of employees while they are in school, as well as the ability to recruit better employees in general, justifies the widespread use of tuition reimbursement even though it provides employees with more marketable skills. A study of salaried employees from a manufacturing firm found that employees are less likely to turn over while enrolled in school and taking tuition reimbursement benefits. Employees who graduated with advanced degrees were then more likely to leave the company than those who were still in school, but the incentive to leave was alleviated if the employee was promoted after earning a degree. A second study found that firms with tuition reimbursement programs paid higher wages and had lower turnover than other employers using a large sample of establishments. Taken together, this research suggests that tuition reimbursement programs help to attract and retain high-quality employees despite the fact that employees gain new and marketable skills.
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References:
- Benson, G., Finegold, D. and Mohrman, S. 2004. “You Paid for the Skills, Now Keep Them: Tuition Reimbursement and Voluntary Turnover.” Academy of Management Journal 47:315-331.
- Cappelli, P. 2004. “Why Do Employers Pay for College?” Journal of Econometrics 121:13-241.
- Fenton, E. 2004. “Employer-provided Education Benefits.” Journal of Accountancy September:49-53.
- International Foundation of Employee Benefit Plans. 2000. The Many Faces of Educational Benefits. Brookfield, WI: Author.
- National Center for Educational Statistics. 1999. Employer Aid for Postsecondary Education. Washington, DC: U.S. Department of Education, Office of Education Research and Development.