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Wednesday, September 22, 2010

Tax Treatment of Employer Educational Assistance for the Benefit of Employees

Linda Levine
Specialist in Labor Economics

Educational assistance offered by employers to their employees may be exempt from federal income tax under Section 127 and Section 132 of the Internal Revenue Code (IRC). Section 127 is the employer educational assistance exclusion; Section 132, the fringe benefit exclusion for working condition benefits (e.g., job-related education) among other benefits. Congress established the two tax provisions well before it enacted other higher education tax benefits meant to assist taxpayers, their spouses, and dependents—regardless of employment status—pay current educational expenses incurred while obtaining postsecondary degrees and undertaking lifelong learning.

The temporary employer educational assistance provision has been extended, often retroactive to its expiration, on numerous occasions. Most recently, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) reauthorized the exclusion of up to $5,250 through December 30, 2010. EGTRRA also reinstated temporarily the exclusion for graduate school expenses, which last was eliminated in 1996.

If employers do not have a qualified educational assistance program as required by the Section 127 exclusion or they exceed Section 127’s limit of $5,250, employers still may exclude educational assistance from an employee’s wages if the education or training qualifies as a working condition fringe benefit. Section 132 of the IRC allows certain fringe benefits to be exempt from an employee’s taxable income. Working condition benefits include services employers provide to employees that employees could deduct as a business expense on their individual tax returns had they paid for it. The Internal Revenue Service test for determining whether educational assistance is a deductible business expense essentially requires courses to be job-related. In contrast, to be eligible for the Section 127 exclusion, the education or training need not be job-related.

Date of Report: September 8, 2010
Number of Pages: 8
Order Number: RS22911
Price: $19.95

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