Payroll Tax Guideline 110: Summary of I.R.C. Provisions Applicable to Employee Tuition Waivers and Remissions

Updated August 10, 2006

In general, the value of employer-provided educational assistance is excludible from an employee’s gross income if it is provided under a Section 127 employer-provided educational assistance plan, qualifies as a Section 132 working condition fringe benefit, or qualifies as a Section 117(d) qualified tuition reduction. For more information, please review Payroll Tax Guidelines 101 and 102 on the Treasurer’s Office Web site or contact the Treasurer’s Office.

§127    Employer-Provided Educational Assistance Programs (EAP’s).

Section 127 EAP’s are separate written plans of employers that provide educational assistance for the exclusive benefit of their employees. The programs must meet certain non-discrimination requirements, and cannot be part of §125 (cafeteria) plans. Reasonable notification of the availability and terms of the program must be provided to eligible employees. Form 5500, Annual Return/Report of Employee Benefit Plan, should be filed with the IRS.

  • For courses beginning after 2001, educational assistance includes payments for, or the provision of any benefits with respect to, any graduate-level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.
  • Section 127 does not apply to spouses, dependents or domestic partners of employees.
  • $5,250 is the maximum annual exclusion.
  • Qualified educational assistance includes payments, waivers, and reimbursements for tuition, fees, and similar payments, books, supplies, and equipment. It does not include tools or supplies that the employee retains after completion of the course or the cost of meals, lodging, or transportation.
  • Qualified educational assistance includes both undergraduate and graduate courses and both job-related and non-job-related courses.
  • The education can be provided at any educational organization with a regular faculty, curriculum, and student body.

§117 (d)    Qualified Tuition Reductions.

  • Qualified Tuition Reductions are tuition waivers or reimbursements provided to employees of educational organizations, their spouses, or their dependent children for courses taken at an educational organization with a regular faculty, curriculum, and enrolled student body.
  • Section 117 (d) only applies to employees of educational organizations – not to all employees of the Commonwealth.
  • Section 117(d) does not apply to domestic partners for federal purposes.   For Massachusetts purposes, the value of the reduction is excluded from gross income when the benefit is extended to same-sex spouses. See IRS TIR 04-17.
  • The exclusion is only for education below the graduate level, unless the tuition reduction is for the education of graduate teaching assistants and research assistants. (University faculty and staff members engaged in teaching and research activities do not qualify as graduate teaching or research assistants.)
  • The Section 117(d) exclusion for qualified tuition reductions does not apply to amounts representing payments for teaching, research, or other services performed by the student that are required as a condition for receiving the tuition reduction.

§132    Educational expenses that qualify as working condition fringe benefits.

  • §132: Gross income does not include any fringe benefit that qualifies as a working condition fringe. A “working condition fringe” means any property or services provided to an employee to the extent that, if the employee paid for the property or services, the payment would be allowable as a business expense deduction.

Educational expenses that would be allowable as business expense deductions.

  • Job-related courses taken by an employee (not spouse, dependent or domestic partner) are excluded from the employee’s gross income. Applies to graduate or undergraduate courses.
  • Job-related defined. The course maintains or improves skills required by the employee in his job or meets the express requirements of the University imposed as a condition to the employee’s retention of salary, status, or employment. (See Payroll Tax Guideline 102)

Educational expenses that would not be allowable as business expense deductions. Educational expenses that are required of the employee in order to meet minimum educational requirements for qualification in his present employment or qualify the employee for a new trade or business. A change in duties is not a new trade or business if the new duties involve the same general work as in the employee’s present job.