Under what is called an "Educational Assistance Program " the employer gets a deduction and employees do not have to recognize income of . However, this applies only to employees and not their children and only applies to employment related education. This is not what University Pathology is looking for.
Employers sometimes establish private foundations as the means for providing scholarship or fellowship grants to employees or their children. The IRS has set forth guidelines for determining whether the scholarship or grant is a taxable expenditure by the foundation. If the guidelines are followed, the grant is not taxable to the foundation and will be excludable from employees income.
The following guidelines address the qualification of foundation programs for exclusion from employee gross income. In addition the normal foundation rules must be complied with. For tax exclusion: 1. The program must not be used by the employer or the foundation to recruit employees or to induce them to continue their employment or otherwise follow a course of action desired by the employer.
2. The selection of recipients must be made by a committee composed entirely of people who are independent and separate from the employer or the private foundation. A former employee is not considered completely independent and separated. Relatives and professionals might also be questionable.
3. The program must impose identifiable minimum requirements for eligibility. In the case of scholarships, such requirements must limit the selection committee's consideration to employees or their children who meet minimum standards for admission to an educational institution for which the grants are available. The educational institution must be one to which contributions are deductible.
4. Selection of recipients must be based on substantial objective standards that are completely unrelated to the employment of the recipients or their parents and to the employer's line of business. My contacts advised me that this might mean that some children who went to college could not be covered.
My contacts at the I.R.S. have advised me that to satisfy the first requirement the children of some former employees or the children of other non- employees must be getting some portion of the scholarship.
Requirement 2 probably would not be what Dr. Mellamed had in mind.
"substantial objective standards".
Moreover, the cost to set up such a foundation would be $3,000 to $5,000 and it could be taken 8 months to 1 year to submit a complete application and get I.R.S. approval. Also you mentioned this could only be a year to year thing.
Generally, under other types of plans and trusts which defray educational costs of employers' children the employer gets a deduction when the funds are actually applied for education but the employee must recognize ordinary income at that time. These plans provide no significant tax benefits. The only way University Pathology employees might find this type of plan desirable would be if in addition to the Plan they got a double bonus to pay the taxes.