Employer Tuition Reimbursement Clawback ?

[Delawaredave5]

Helping a friend - his employer had a tuition reimbursement program - with the stipulation that he has to work there a year after end of each semester - if he quits before that period, that semester tuition reimbursement needs to be returned.

He is planning to leave for a better job - and so understands that $7,500 will fall under the above stipulation.

Two questions:

1. Last year when the tuition was reimbursed, it showed up as additional taxable income on their W-2 - and I believe tax was paid.

If he pays this money back in a lump sum, does the employer report this as "negative income" ? Would the 2019 W-2 be reduced by $7,500 paid back ? (this would seem fair and appropriate for person to get back taxes paid last year).

2. Anyone have experience with whether a company would pursue getting this money back ? Negotiable ? I'm assuming they could sell this to a collections company fairly easily.

Thanks !

 

[cathy63]

1) For 2018, the exclusion was $5250, so the employer should have added $7500 - $5250 = $2250 to the income reported in box 1 of his W-2. He did pay tax on the $2250. If he pays this money back in a lump sum, he can deduct the $2250 on Schedule A if he itemizes. If he doesn't itemize, then he's just out of luck. See IRS pub 525 for info on repayments.

2) Yes, companies I have worked for would definitely expect to get this money back, though usually it was prorated for the amount of time the employee stayed in the job after receiving the benefit. I've never heard of it going to collections because it's just basic professionalism for the employee to abide by the agreement he signed when he accepted the money and it would ruin his reputation and any future references from that employer to do otherwise.

 

[clobber]

Ohh no! You're friend is running into one of the dreaded new problems created by TJCA. I think you are going to find that cathy63 is correct. Because the payment and repayment are made in different tax years, he will wind up paying the tax and not getting it back.

There is a good paper on the subject here.

 

[Delawaredave5]

Thanks for everyone's help ! The article is very helpful.

Looks like deduction is out of question. Article does reference a credit, below, hopefully that can apply.

Wish there was some way he could repay the money and get W2 adjusted downward in either current or previous year.
=========
• Repayment over $3,000. If the amount repaid is more than $3,000, taxpayers may deduct the repayment. However, they can choose instead to take a tax credit for the year of repayment if they included the income under a claim of right (meaning that at the time taxpayers included the amount in income it appeared that they had an unrestricted right to it). If they qualify for this choice, they may figure their federal income tax under both methods and compare the results and use the method (deduction or credit) that results in less tax. (Rev. Rul. 67-48, 1967-1 CB 50.)

 

[cathy63]

He won't be over $3K unless he had reimbursement for two semesters included in his 2018 W-2. In that case, he would have paid taxes on the entire $7500 amount that he'll have to pay back and that would put him over the limit.

He might also be able to amend his 2018 return in order to take some education credits that he wasn't eligible for when his employer was paying his tuition.

 

[Delawaredave5]

He's over $3k; the $7,500 he owes is beyond the $5250.-- they employer paid out $13750 in tuition.

So looks like can be taken was a credit in 2019? He doesn't itemize.

Thanks !

 

[zinger1457]

Depending on how badly the new employer wants your friend he might be able to convince the new employer to pay him the amount he has to reimburse his old employer. Had a couple guys in my previous job that were successful doing that, it was part of the negotiations before they accepted the new position. These were in high demand engineering positions.

 

[Red Badger]

Depending on how badly the new employer wants your friend he might be able to convince the new employer to pay him the amount he has to reimburse his old employer. Had a couple guys in my previous job that were successful doing that, it was part of the negotiations before they accepted the new position. These were in high demand engineering positions.

Yup. Perhaps in lieu of, or as part of a signing bonus?

 

[target2019]

Long term payoff may come from hanging in there, rather than paying back the money according to agreement.
When I took advantage of tuition reimbursement at megacorp, I included the benefit in my analysis of other jobs since I was actively using the program. When I left (megacorp idea) the degree was mine to keep. There was a payoff IMO in next job.