The Catholic University of America

Summary of Federal Laws

Tax

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Tax Issues Related to Students

Section 127 Educational Assistance Programs

26 U.S.C. § 127, 26 CFR 1.127-1 et seq

This provision of the code allows amounts paid by an employer for the education of an employee to be excluded from the employee's gross income as long as the program attended is a qualified educational assistance program. The I.R.C. § 127 tax exemption for employer-paid education assistance allows up to $5,250 to be excluded from gross income annually. The 127 exemption covers not only employer provided educational assistance for undergraduate education, but graduate education as well. This $5,250 tax free income may be used by employees for tuition, books, and fees for both job-related and non-job related education. The program qualifies as an educational assistance program if the following requirements are 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.

Section 127 is set to expire on December 31, 2012.

Online resources:

Guidance on the above, aimed at the taxpayer, can be found in IRS Publication 970, Tax Benefits for Higher Education.  The publication is available online with an extensive explanation in PDF format and a Q & A section.

 

CCR updated CFR link 7/7/15