June 16, 2014

MinistryCPA Special Topic: Qualified Tuition Reduction Plan Guidelines

The IRS lays out very specific and stringent regulations for organizations that offer tuition reduction plans to their employees (e.g., Publications 15B525, and 970). Below is a brief overview of the major guidelines that non-profit organizations should keep in mind when implementing such plans for primary, secondary, and undergraduate higher education.

First, qualified tuition reduction plans are not taxable as compensation to the employee. If an organization meets all of the requirements for a qualified plan, this can be an extremely valuable benefit to employees.

Second, tuition reduction plans must be received from, and used at, an eligible educational institution. According to Publication 970, "An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities." Therefore, a homeschool is ineligible.

Third, qualified tuition reduction plans must not discriminate in favor of highly compensated employees. Publication 970 says, "The tuition reduction benefits must be available on substantially the same basis to each member of a group of employees." Since they are a fringe benefit, tuition reduction plans are not intended as a method of compensation for the services of "volunteers."

Finally, a tuition reduction program qualifies if it covers:
  • A dependent child of a current or retired employee, or one who left because of disability
  • The employee him/herself
  • A widow or widower of an employee meeting those conditions
While these guidelines should provide some direction for non-profit organizations, each organization's situation is unique and may require professional assistance.

Church Intern Compensation Guidelines

Question:

A church recently began a summer internship program. What guidelines does it need to be aware of when implementing this program?

Answer:

First, the church should consider fair compensation for any interns. Although many internships are unpaid, the Wall Street Journal in April 2014 covered increased scrutiny of unpaid interns. According to the Fair Labor Standards Act, unpaid internships should not be for the direct advantage of the employer, should benefit the intern and be educational, and must not displace regular employees. Churches should carefully apply these standards when considering intern compensation.

Second, an intern is not typically an ordained or licensed minister, and should not be treated as a dual-status minister. Generally, interns will be subject to the same federal and state income tax withholding and  FICA withholding and matching rules as normal employees. For more on the dual status of ministers, read this previous blog post.

If the church provides housing along with the internship, as many organizations do, the value of the housing is not exempt from taxation unless it is provided for the convenience of the employer and as a condition of employment, per IRS Publication 525. Non-exempt housing is subject to withholding and matching of FICA tax, as well.

Most organizations do not extend fringe benefits to seasonal workers, but each church should make its own decision regarding benefits such as health insurance and vacation time.