Summary of Federal Laws

 

Tax

 

Tax Issues Related to Students

 

Tuition Programs Under 117, 127 and 132 of the Internal Revenue Code 

Section 117 Qualified Tuition Reduction Programs (special tax benefit for employees of educational institutions)

 

A qualified tuition reduction under 26 USC § 117(d) is any reduction in tuition provided by an educational institution to an employee for the education of an employee or certain relatives of the employee at the institution the employee works at or another qualified institution.  A qualified tuition reduction is tax-free only if it is for education below the graduate level, with an exception for graduate students engaged in teaching or research at the university.  The term does not include a reduction that represents payment for services.  Tax-free tuition reduction is also available to a former employee who retired or left on disability; a widow or widower of an individual who died while an employee, a widow or widower of a former employee who retired or left on disability, or a dependent child  or spouse of an employee or any of the above. See 26 USC § 152  for IRS definition of dependent. Basically, this covers a child or stepchild who received over half of their support from the taxpayer. 

 

If both parents have died, and if one of the parents qualified under the list above, the child, if under age 25, can qualify for a tuition reduction from income.  See 26 USC § 132 (h) for the age reference. § 117(d) refers to this sectionof the tax code. Note that for graduate teaching or research assistants the tax-exemption is not available for that portion of the reduction that represents payment for teaching, research or other services that are required as a condition for receiving the reduction. See Prop. Treas. Reg. § 1.117-6(d), 53 Fed. Reg. 21,688 (June 9, 1988).  The plan in question must comply with the prohibition against discrimination in favor of highly compensated employees under I.R.C. § 117(d)(3).   This provision of the code, 26 USC § 117(d), was added pursuant to the 1984 Tax Act. There is not cap on the amount of tuition reduction that will qualify.

  

Section 127 Tuition Assistance Programs (not limited to employees of educational institutions) 

Unlike the unlimited benefits of qualified tuition reductions under 117 of the Code,  Section 127 of the Internal Revenue Code makes it possible for employers (not just educational institutions) to provide up to $5,250 per year to their employees in tax-free reimbursement for tuition, books, fees, supplies and equipment for job or non-job related education as part of a "qualified educational assistance program." An exclusion from income is not allowed for supplies, (other than textbooks) that the employee can retain after the course is over, or for meals lodging or transportation. Courses in games, hobbies or sports not related to the employer's business are not covered. A sports coach for the university would be able to exclude a course on that particular sport. In order for the plan to be qualified, a number of different requirements must be met: 

• The benefit must be offered on a non-discriminatory basis that does not favor highly compensated employees.
   
• Reasonable notification of the availability and terms of the program must be provided to eligible employees.
   
• There must be a separate written plan for the program.
  
  
• The program may only be for the benefit of employees (including retired, disabled or laid off employees), and not for the benefit of the employee's spouse or children, and
   
• The plan cannot offer the employee a choice of taxable income or educational assistance.
   

IRC § 127 was added by the Revenue Act of 1978. Provision of the benefit has been an on again, off again proposition. For calendar year 2001, the section 127 benefit was not available for graduate coursework. However, as part of the "Economic Growth and Tax Relief Reconciliation Act of 2001," which became law on June 7, 2001, section 127 of the Internal Revenue Code was extended permanently for both graduate and undergraduate courses, beginning January 1, 2002. The amendment made by the law struck the language that prohibited payment for "any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical or other advanced academic or professional degree."  There is a cap on the benefit of $5,250 per year. However, the fact that the tuition benefit is not limited to courses below the graduate level will make it more desirable in some instances than the § 117 benefit.

  

For more on this topic, see Bert Harding's December 2001 Issue of the Month:

What are the Pros and Cons of Providing Tuition Reductions under a Section 127 Plan versus a 117(D) Plan?

 

Section 132 (and 162) Working Condition Fringe Benefit (A limited benefit available to anyone who can meet the conditions)

 

Section 132 of the IRC covers fringe benefits, and section 162 of the IRC covers trade or business expenses. Section 132 (d) of the tax code defines a working condition fringe benefit as "any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167."  

Educational expenses may be considered excludable from income as a working condition fringe benefit if certain conditions are met. The rules are contained in 26 CFR § 1.162-5. The general rule is that the coursework must either maintain or improve skills required by the individual in his/her employment, or meet the express requirements of the individual's employer, or requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. The cost of coursework may not be excluded under Section 132 if it is needed to meet minimum educational requirements for the job, or it qualifies the employee for a new trade or business. A change of duties in the same line of business does not constitute a new trade or business.  The working condition fringe benefit does not have a monetary cap. 

The tax code provides at 26 U.S.C. § 132 (j) (8) that amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under Section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe benefit.

 

See a model Affidavit of Qualification that can be used to implement the educational assistance fringe benefit provision.

 

IRS Publication 508 "Tax Related Benefits for Work-Related Education" has a flow chart that can be used to determine benefit eligibility. For a cautionary note on using § 132 for graduate tuition waivers for non-TA/RA employees see Bert Harding's Memo "IRS Proposes to Tax Business-Related Graduate Tuition Waivers" and Tax Free Tuition Benefits (Dec. 2002).

 

Comparison Chart of Different Tax Benefits.

  

	Section 117	Section 127	Section 132
Undergraduate	yes	yes	yes*
Graduate	No, unless graduate teaching/research assistant***	yes**	yes*
Books, fees, supplies	no	yes	yes
transportation	no	no	Maybe, see IRS Publication 508
Monetary cap	no	$5,250 per year	no
Paperwork required

 

* The cost of coursework may not be excluded under Section 132 if it is needed to meet minimum educational requirements for the job, or it qualifies the employee for a new trade or business. 

** for courses taken after Jan. 1, 2002.    

*** Note that for graduate teaching or research assistants the tax-exemption is not available for that portion of the reduction that represents payment for teaching, research or other services that are required as a condition for receiving the reduction.

 

 

Resources
Tax Treatment of Employer Educational Assistance for the Benefit of Employees: CRS Report No RS22911 Dated July 3, 2008

 

 

 

 

  New page created July 19, 2002
updated 7-27-08 to add CRS report