Magazine article The CPA Journal

Employee Educational Assistance: Weighing the Options

Magazine article The CPA Journal

Employee Educational Assistance: Weighing the Options

Article excerpt

Employee educational assistance is a valuable benefit for the employer and employee. Employers benefit by attracting and maintaining a qualified work force, while employees are able to enhance their knowledge and skills. Tax law provides several options for structuring employee education assistance. In RRA '93, a major such option, the IRC Sec. 127 exclusion for employee educational assistance plans, was retroactively extended from June 30, 1992, through December 31, 1994. The legislative history of the Act reveals that even if employee educational assistance fails to qualify for exclusion under IRC Sec. 127, exclusion may still be attainable as a working condition fringe benefit under IRC Sec. 132.

IRC SEC. 127

IRC Sec. 127 provides that an employee can exclude from gross income a maximum of $5,250 of employer provided educational assistance during a calendar year. To qualify for this exclusion, certain criteria must be met. These include-

* The employer must have a separate written plan;

* The plan must be for the exclusive benefit of employees;

* The plan must be for the purpose of providing employees with educational assistance;

* The plan must not discriminate in favor of highly compensated employees, or their dependents. (Excluded from this provision are a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that educational assistance benefits were the subject of good faith bargaining between employee representatives and such employer or employees.);

* No more than 5% of the amount paid or incurred by the employer for educational assistance during the year may be provided to a class of individuals who ate shareholders or owners (or their spouses or dependents), each of whom (on any date of the year) owns more than 5% of the stock or of the capital or profit interest in the employer;

* There must be reasonable notification of the availability of the program provided eligible employees; and

* There must be satisfaction of certain reporting requirements; and

* Employees qualifying for exclusion of educational benefits under IRC Sec. 127 are prohibited from taking a deduction or credit it for the amount of assistance received.


The term employee includes-

* Retired, disabled, or laid off employees;

* Present employees on leave, e.g., those on active duty in the arm forces; and

* Self-employed individuals within the meaning of IRC Sec. 401(c).

Eligible costs include, but are not limited to tuition, fees, books, supplies, and equipment. These cost are eligible even if the courses taken lead to an advanced academic or professional degree. Ineligible costs include those for tools or supplies the employee may retain after completing the course of instruction and meals, lodging, or transportation. In addition, the cost of education relating to sports, games, or hobbies are ineligible, unless the education involves the employer's business, has a reasonable relationship to an activity maintained by the employer for profit, or is required as part of a degree program. The ineligibility of sports, games, or hobbies does not extend to education concerning how to maintain or improve health so long as the course does not involve the use of athletic facilities or equipment and is not recreational in nature.


Although IRC Sec. 127 provides criteria that can assure exclusion from employee gross income, the potential benefit is limited to $5,250 per year. An alternative to IRC Sec. 127, expressly mentioned in the legislative history of RRA '93, is to have education benefits qualify as a working condition fringe benefit under IRC Sec. 132(d). IRC Sec. 132 does not prescribe dollar limitations, the requirement for a plan, or strict restrictions on what constitutes eligible expenses. …

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