At the end of last year, we alerted you that the beneficial tax
treatment of educational assistance programs under Section 127 of
the Internal Revenue Code (the Code) pursuant to which an employer
pays, or reimburses, an employee for up to $5,250 in educational
assistance was set to expire on December 31, 2012 and it was
unclear whether Congress would act to extend it. We now write to
inform you that under the American Taxpayer Relief Act of
2012—i.e., the fiscal cliff legislation—Congress has
extended the ability of employers to pay or reimburse an employee
on a tax-free basis for up to $5,250 in educational assistance
(which does not have to be job-related) under a written plan of the
employer.
To qualify as an educational assistance program under Code Section
127, an employer's program must generally, among other
things:
- Provide benefits exclusively to employees of the employer;
- Provide qualified educational assistance benefits (e.g., tuition, fees and similar payments and books). Such a program may not provide benefits for any meals, lodging or transportation or for a course or other education involving sports, games or hobbies;
- Be a separate written program established by the employer and disclosed to employees;
- Not allow employees a choice between educational assistance benefits and additional taxable income; and
- Not discriminate in favor of highly compensated employees.
No more than $5,250 can be excluded from an employee's
income each calendar year under a Code Section 127 plan. If an
educational assistance arrangement fails to comply with the
Code's requirements, the educational assistance provided will
be treated as taxable wages to the employee unless the educational
assistance meets the standards of other parts of Code - such as the
working condition fringe rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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