Is Education Assistance to a Pastor Considered Taxable Income?

Question:

The pastor of a small church is furthering his education while fulfilling his duties as a minister. He wishes to complete a master's degree to improve his knowledge and abilities as a Christian leader. If the church pays the university for its pastor's master's degree, is the benefit taxable income to him? 

Answer:

There are two options to be considered when answering this question. The IRS provides two avenues in which education benefits provided by the employer may be excluded from taxable income, each with separate requirements. The education assistance may be excluded from income if it qualifies as a working condition fringe benefit or is part of an educational assistance program.

1) Working Condition Fringe Benefit

If education benefits meet certain requirements they may qualify as a working condition fringe benefit, and therefore be excluded from income. IRS Publication 15-B (2020) describes the specific requirements that must be met for job-related education expenses to be excluded from income. It is important to note that each course must be individually considered, and degree programs may not always qualify. 

In order to be considered a workplace benefit, the education must meet one of two tests. The education must either maintain or improve skills needed in the job, or be required by either the employer or law to keep his job or present salary. 

Furthermore, the IRS describes that the education does not qualify as a working condition fringe benefit if it 1) is needed to meet the educational requirements of the employer or 2) is part of a program that will qualify the employee for a different trade or business. 

Considering these requirements, the education expenses of the pastor described in the above situation may qualify for exclusion since the courses would, in fact, improve his skills as a pastor. However, the church must be careful that the education is not needed to meet the standard requirements of the pastor. For example, if the church requires that their pastor has a Master of Divinity then hires an individual and pays for him to get his master's degree, the education assistance does not qualify and is taxable as income.  

2) Educational Assistance Program

Another option the church might consider is whether to set in place an educational assistance program for its employees. Chapter 11 of IRS Publication 970 (2019) states that taxpayers can exclude up to $5,250 of educational assistance benefits provided by their employer under a qualified educational assistance program. Any educational benefit over $5,250 is taxable as income. An educational assistance program must be a nondiscriminatory, written plan provided only to employees. It also must meet each of the following requirements found in IRS Publication 15-B.

1. The program benefits employees who qualify under set rules that don't favor highly compensated employees. (For a church, essentially, "highly compensated" doesn't apply if total compensation does not exceed $125,000.)
2. The program doesn't provide more than 5% of its benefits to shareholders or owners (of which, of course, churches have none).
3. The program doesn't allow employees to receive cash or other benefits instead of educational assistance.
4. Eligible employees are given reasonable notice of the program.