In addition to cost savings realized by reducing turnover-related costs, tuition programs can offer employers a way of reducing their tax burdens.
For all employers, adhering to Sections 127 and 132 of the Internal Revenue Code (IRC) or failure to do so will determine the tax-exempt status of companies’ educational reimbursements.
The following is an overview, but always seek out the advice of tax advisors prior to making any tax-related decisions.
Section 127: Qualified Educational Assistance Programs
Under IRC Section 127, an employer can deduct up to $5,250 per calendar year for each employee that qualifies for and elects to utilize the employer’s qualified educational assistance plan.
Per the IRS’ Fringe Benefits Guide, Section 127 defines a qualified educational assistance plan as meeting the following criteria:
- The employer must have the components of the qualified educational assistance plan documented in writing.
- The plan may not offer other benefits that can be selected instead of education.
- If the employee has multiple employers, the benefit cannot exceed $5,250 per calendar year for all employers combined.
- Eligible employees include current and/or laid off employees, retired employees, employees on disability, and certain self-employed individuals.
- Employees’ spouses and dependents are not eligible.
- Employers cannot define employee eligibility in a way that discriminates in favor of highly compensated employees.
- Qualified educational expenses include tuition, books, supplies, and equipment necessary for class.
- Tools or supplies that the employee may keep after completing the course are not eligible.
Section 132: Education as a Working Condition Fringe Benefit
Section 132 of the IRC provides a way for employers to exclude job-related educational expenses that are not reimbursable under a Section 127 plan from an employee’s income for tax purposes.
In addition to current employees, these fringe benefits can also be offered to independent contractors, directors and partners, and volunteers.
There are important differences between these education-related fringe benefits and the educational assistance benefits defined by Section 127, including:
- Unlike Section 127, there is no dollar limitation to education fringe benefits that adhere to Section 132.
- Educational courses must be job-related under Section 132.
- While tuition, books, supplies, and education-related equipment can be eligible under both sections, Section 132 also allows employers to cover the cost of employee meals, lodging, or transportation necessary to attend qualified courses.
- Under Section 132, education fringe benefits are not subject to non-discrimination requirements.
(See the table below for a side-by-side comparison.)
As mentioned above, in order for courses to be eligible under Section 132, they must be job-related and maintain/improve the employee’s job skills, or be required by the employer or the law.
Courses are not eligible if they would be needed to meet the minimum job requirements of the employee’s existing role, or if they qualify the employee to enter a new trade or business.