Education assistance offered by ACU to an employee may be exempt from federal income tax under Section 117, section 127, or Section 132 of the Internal Revenue Code.
A qualified tuition reduction under Section 117 is any reduction in tuition provided by an educational institution to an employee for the education of an employee or certain relatives of the employee at the institution the employee works at or another qualified institution. A qualified tuition reduction is tax-free only if it is for education below the graduate level, with an exception for graduate students engaged in teaching or research at the university. The term does not include a reduction that represents payment for services.
Unlike the unlimited benefits of qualified tuition reductions under 117 of the Code, Section 127 of the Internal Revenue Code makes it possible for employers (not just educational institutions) to provide up to $5,250 per year to their employees in tax-free reimbursement for tuition, books, fees, supplies and equipment for job or Non-job related education as part of a "qualified educational assistance program." An exclusion from income is not allowed for supplies, (other than textbooks) that the employee can retain after the course is over, or for meals lodging or transportation. Courses in games, hobbies or sports not related to the employer's business are not covered. A sports coach for the university would be able to exclude a course on that particular sport.
IRC § 127 was added by the Revenue Act of 1978. Provision of the benefit has been an on again, off again proposition. For calendar year 2001, the section 127 benefit was Not available for graduate coursework. However, as part of the "EcoNomic Growth and Tax Relief Reconciliation Act of 2001," which became law on June 7, 2001, section 127 of the Internal Revenue Code was extended permanently for both graduate and undergraduate courses, beginning January 1, 2002. There is a cap on the benefit of $5,250 per year. However, the fact that the tuition benefit is not limited to courses below the graduate level will make it more desirable in some instances than the § 117 benefit.
Section 132 of the IRC covers fringe benefits, and section 162 of the IRC covers trade or business expenses. Section 132 (d) of the tax code defines a working condition fringe benefit as "any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167."
Educational expenses may be considered excludable from income as a working condition fringe benefit if certain conditions are met. The rules are contained in 26 CFR § 1.162-5. The general rule is that the coursework must either maintain or improve skills required by the individual in his/her employment, or meet the express requirements of the individual's employer, or requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. The cost of coursework may not be excluded under Section 132 if it is needed to meet minimum educational requirements for the job, or it qualifies the employee for a new trade or business. A change of duties in the same line of business does not constitute a new trade or business. The working condition fringe benefit does not have a monetary cap.
The tax code provides at 26 U.S.C. § 132 (j) (8) that amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under Section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe benefit. This means that the working condition fringe benefit canNot be applied to the internal ACU discount.
IRS Publication 508 "Tax Related Benefits for Work-Related Education" has a flow chart that can be used to determine benefit eligibility.
Comparison Chart of Different Tax Benefits.
|Section 117||Section 127||Section 132|
|Graduate||No, unlesss graduate teaching/research assistant***||Yes**||Yes*|
|Books, fees, supplies||No||Yes||Yes|
|Transportation||No||No||Maybe, see IRS Publication 508|
|Monetary cap||No||$5,250 per year||No|
* The cost of coursework may not be excluded under Section 132 if it is needed to meet minimum educational requirements for the job, or it qualifies the employee for a new trade or business.
** For courses taken after Jan. 1, 2002.
*** Note that for graduate teaching or research assistants the tax-exemption is not available for that portion of the reduction that represents payment for teaching, research or other services that are required as a condition for receiving the reduction.