Payment of Benefits Under the State's Academic Assistance Program

It is the policy of the State of North Carolina to comply with all applicable federal and state regulations regarding the payment of benefits under the State's Academic Assistance Program.

State Budget Manual - Personnel Policies and Regulations Section

State Personnel Manual - Training - Academic Assistance Program

Internal Revenue Service - Publication 970

The Office of State Personnel (OSP) is responsible for administering the educational assistance plan for the State of North Carolina. This policy is set forth in the OSP Personnel Manual and outlines the situations in which it is permissible to pay for or reimburse the employee for expenses incurred in furthering the employee's education or improving their job skills. The tax status of educational assistance payments is determined by reference to the Internal Revenue Code Section 127 and the applicable IRS Regulations.

The following requirements are imposed by the Internal Revenue Service:

Benefits up to $5,250.  If an employee receives educational assistance benefits from their employer under an educational assistance program, the employee can exclude up to $5,250 of those benefits each year. The employer should not include the benefits with the employee's wages, tips, and other compensation shown in box 1 of Form W-2.

Benefits over $5,250.   If the employer pays more than $5,250 for educational benefits for the employee during the year, the employee must generally pay tax (FICA, federal income tax withholding and state income tax withholding) on the amount over $5,250. The employer should include in the employee's wages (Form W-2, box 1) the amount that he or she must include in income.

Working condition fringe benefit.   However, if the benefits over $5,250 also qualify as a working condition fringe benefit, the employer

does not have to include them in the employee's wages.

If an employee transfers to another state agency, and subsequently completes an approved course, the employee should submit a request for reimbursement to the employing agency.  The employing agency is responsible for processing the request per the provisions of this policy, and providing reimbursement if funds are available.

Employees who separate from state service, except by reduction in force are not eligible for reimbursement.

The Accounts Payable section of an agency is responsible for paying educational assistance costs and determining the tax status of such payments.  When the expenses are paid, the Accounts Payable staff must submit a Form OSCPXA 12, Education Expense (Taxable) Form, to the Payroll Office identifying all taxable educational assistance costs paid to an employee.  Form OSCPXA 12 is available at:

http://www.ncosc.net/sigdocs/sig_docs/payroll/Payroll_Forms.html

Taxable Expenses

Taxable educational assistance costs are included as additional salary in the employee's next payment.  If the employee has separated from the agency, the amount of salary reported is "grossed up" to accommodate the tax withholding.

The process for recording taxable educational assistance expenses for a current employee involves the following:

• Expenses are added as a split payment line to the employee's gross wages and are recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed according to the employee's W-4 and NC-4 elections.
• The expenses are not subject to retirement contribution.
• The amount of the expense is also added as a deduction using deduction code 062, Education Expense (Taxable).  Note: The deduction code must be manually removed before the employee's next payment.

If the employee has separated from the agency and is not eligible for any pay, the amount of salary entered into the Central Payroll System must be "grossed up" to ensure the net pay amount is zero.  The calculation for the gross salary amount follows:

* Calculation based on 100% cost less 7.65% current FICA rate = 92.35%

The calculation should be verified by multiplying the gross salary amount by 6.2% for OASDI and 1.45% for HI and then adding the two products.  When added, the result must equal the difference between the gross salary amount and the deduction amount. This verification allows for any rounding differences that may result during the payroll processing cycle. 

Once the gross salary amount is determined, the reimbursement is processed as follows:

• The gross salary amount is recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed at the current flat rate.
• The expenses are not subject to retirement contribution.
• The amount of the expense is added as a deduction using deduction code 062, Education Expense (Taxable).

When the payroll is processed, the Central Payroll Division remits a paper check for the amount of the 062 Education Expense (Taxable) deduction to the agency as reimbursement for the original amount added as an adjustment to the employee.  The agency must receipt the deposit of the reimbursement against account 532941 Educational Assistance Program -Taxable.

This policy applies to all State entities.

There are no exceptions to this policy.

• Working Condition Fringe Benefit - is a benefit which, if the employee had paid for it, he or she could deduct it as an employee business expense.