Education Assistance (IRS Code Section 127)
In general, gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if:
- The assistance is furnished pursuant to a written educational assistance program established for the benefit of employees who qualify under a classification set up by the employer;
- The program is not discriminatory in favor of highly compensated employees; and
- Reasonable notification of the availability and terms of the program is provided to eligible employees.
Congress retroactively re-enacted this section (with changes) for the eighth time with passage of the Taxpayer Relief Act of 1997. Legislation passed in November of 1999, extended this tax protection through Dec. 31, 2001 for undergraduate courses only. It did not include graduate courses. The Economic Growth and Tax Relief Reconciliation Act of 2002 extended the provisions for Code Section 127 through 2010 with the inclusion of graduate classes. The current regulations include:
- All course/class work beginning before December 31, 2010
- Undergraduate and graduate course work. (The graduate provision was not included from July 1, 1996 to December 31, 2001)
- A maximum cap of $5,250 for non-taxable educational assistance per calendar year cumulatively for all qualified courses taken by employees, their spouses and/or children and legal dependents.
- Payment of or provision for (waiver) tuition, fees, books, supplies and equipment (does not include tools and supplies retained by the employee after completion of the course). Current University policy does not allow payment of employee personal expenses which includes books for classes.
The current regulations disallow the following:
- Any payment for a course or education involving sports, games or hobbies (unless the course is required as part of a degree program).
- Any payment for meals, lodging or transportation
Qualified tuition reduction (IRS Code Section 117-d)
This is a special provision that only applies to the educational assistance offered by educational institutions to their employees (including retired or disabled former employees, spouses and dependent children). Regulations include the following:
- Qualified tuition reductions (waivers) are tax-free. Qualified expenses are required tuition, fees, books and equipment. The CAPP Manual does not allow payment of employee personal expenses which includes books for classes;
- Only undergraduate courses/classes are tax-free with the following exception. Graduate level courses taken by teaching or research assistants are entitled to the income exclusion (tax-free status). Note, however, that payments for services, even if required of all students receiving assistance, are taxable wages. A classification of Graduate Teaching Fellow, Graduate Teaching Assistant or Graduate Research Assistant by the Graduate School qualifies graduate employees for the tax-free benefit of this code section;
- There is no requirement that the education be job related, nor is there a maximum dollar limitation;
- The program must not favor the highly compensated;
- There are no restrictions on the type of courses/classes taken except that they may not be graduate classes (exception as noted above); and
- There is no requirement that the employee be a candidate for a degree (only recipients of scholarships and fellowships are required to be candidates for a degree).
Last modified: April 13, 2018