ISSUE:

A qualified tuition reduction “program” must meet certain criteria in order to pass IRS muster.

 

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).

The TBC Controller has recently attended a workshop on these programs at a conference and is concerned about TBC’s “plan.”  They ask us about graduate level courses and about “non-discrimination” requirements.

Section 117 allows tuition assistance for degree candidate employees (and some “family members”) under a written plan for courses under the graduate level.  There is an exception for “grad assistants.”

If the requirements of I.R.C. section 117(d) are met, the qualified tuition reduction for undergraduate courses is not included as wages on the employee’s Form W-2 and is exempt compensation for Federal income tax, Federal income tax withholding, FICA, and FUTA.

There is a limitation imposed on a “Section 117 Tuition Reduction Plan” in that the reduction must not discriminate in favor of highly compensated, etc.  “The qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term ‘highly compensated employee’ has the meaning given such term by section 414(q)” – current threshold = $120,000 (just updated by IRS Notice 2017-64).

 

RULES:

From Internal Revenue Code section 117(d)(2):

For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in in section 170(b)(1)(A)(ii) of:

(A)  such employee, or

(B)  any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).

*Note that I.R.C. section 132(h) includes in the definition of “employee”:

  1. Retired and disabled employees
  2. Surviving spouses of employees (who died while employed by the employer or was an “employee” by definition of 1 above)
  3. Spouses and dependent children of an employee

From Internal Revenue Code section 117(d)(5):

In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase “(below the graduate level)”.

 

BOTTOM LINE:

  • Most higher education institutions have a “qualified tuition reduction” program.
  • As a best practice, the program/plan should be in written form and must conform to the tenets of I.R.C. section 117(d).
  • There is a limitation on courses taken by degree candidates below the graduate level.
  • An exception to the “graduate level” clause exists for “grad assistants.”
  • 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.