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Sunday, July 13, 2014

Starbucks College Plan and Taxes

I'm intrigued by the recent announcement by Starbucks that they would provide tuition reimbursement for employees (working at least 20 hours per week) who are working on their undergraduate degree. There are a few rules, but it still seems to be a decent deal for the employees.  The courses must be taken online at Arizona State University. Freshman and sophomores get partial reimbursement and juniors and senior get full reimbursement. Apparently this is to encourage the students to complete their degree. And, of course, they need to be admitted to ASU.

The FAQs on the Starbucks website states that the student must also secure financing:

 "You will receive an automatic, upfront scholarship to cover part of your tuition costs. You never have to repay this scholarship. You will also submit a Free Application for Financial Aid (FAFSA), and may qualify for need-based financial aid through ASU, federal Pell Grants or other student aid. Your financial aid counselor will help you apply."

Another aspect that seems a bit confusing is FAQ 7:

"Each time you complete 21 credits, you are reimbursed for the full cost of the tuition and mandatory fees for those credits, as well as any other credits you earned that semester—provided you remain eligible for benefits, enrolled in classes and on track to graduation. Your reimbursements automatically appear in your paycheck— you don’t have to fill out additional forms or take extra steps to make it happen."

As Starbucks notes, college completion rates are quite low (under 50%) compared to how many students start college (about 70% of high school grads). Perhaps support from your employer will help.  But this will depend on the follow up Starbucks puts into this. For example, will shift scheduling consider when the employee has extra studying to do? Will they allow the student to log-on to the online courses at the workplace (free wifi!)?

What about the tax consequences? Among the numerous tax benefits for higher education is one for employer-provided educational assistance under IRC Section 127. The exclusion is a maximum of $5,250 per year and there must be a written plan (among a few other requirements).  (For a quick review of this, see page 64 of IRS Pub 970.)  It looks like that will cover about 10 units per year.  ASU has a nice tuition calculator on their website.

This won't help all students as some will likely prefer and do better in a face-to-face setting. But someone looking for some financial assistance with tuition and ok with all online, may seek out part-time work at Starbuck's.

Should there be a different tax break for this type of plan?  Or perhaps no tax break?  After all, if an employee gets $5,000 tuition paid for by their employer and it is subject to tax, that is still a better deal than having to come up with the entire $5,000 yourself.

What do you think?  How should the tax law fit into a plan for an employer to help an employee finish their undergrad degree?

Nov. 2016 update - ASU asked that I share this link -  So, here it is.

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