ISSUE:

A qualified tuition education assistance “program” could be something that would benefit your institution – and Congress may be sweetening it!

 

SITUATION:

Troas Bible College (TBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  TBC has a written “tuition assistance program” under Internal Revenue Code section 117(d), but has not contemplated the potential benefits of also having a “Section 127” plan, which could cover graduate-level courses.

The TBC Controller asked us last week about their I.R.C. section 117 program.  Now, they want to know about what opportunities might be available under a “Section 127” plan.

Section 127 allows the payment of up to $5,250* annually for “educational assistance benefits.”  These are enumerated in I.R.C. section 127(c) and include a broad definition of “education” with items such as expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment).

Currently, there are two bills in Congress (s. 2007 and H.R. 4135) that may increase the long-standing $5,250 amount to $11,500 – with an automatic inflation adjustment going forward.

Amounts that exceed the annual threshold (currently $5,250) may be excludable from income if they are deemed a “working condition fringe benefit.”  This generally includes “Qualifying Work-Related Education” and “Education to Maintain or Improve Skills,” but not “Education Required by Employer or Law.”  Check out IRS Publication 970 for more on this topic.

 

RULES:

From Internal Revenue Code section 127(a)(1):

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 program which is described in subsection (b).

From Internal Revenue Code section 127(b)(1):

For purposes of this section, an educational assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of paragraphs (2) through (6) of this subsection.  [Paragraphs 2-6 relate to eligibility, limitations on owner benefits, no need to “fund” the program, and notification of employees.]

From Internal Revenue Code section 127(c)(1):

The term “educational assistance” means

(A) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), and

(B) the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment), but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation.

The term “educational assistance” also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.

 

BOTTOM LINE:

  • Generally, any employer may sponsor an “educational assistance program.”
  • The program/plan must be in written form and must meet the requirements set forth in I.R.C. section 127(b).
  • There is a maximum annual threshold of $5,250. (However, current pending legislation may increase that amount to $11,500 – with an automatic inflation adjustment going forward.)
  • Amounts over the $5,250 threshold may be excludable from an employee’s income if these amounts involve “Qualifying Work-Related Education” and/or “Education to Maintain or Improve Skills.”
  • Institutions should pay close attention to the rules that prohibit the programs from discriminating in favor of “highly compensated” employees.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.