CRS_January_2005_Current_Tax_Status_of_Employer_Education_Assistance.pdf: 2561 downloads, before Oct. 1, 2020

Levine, Linda

Lyke, Bob

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The Current Tax Status of Employer Education Assistance

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Federal Publications Key Workplace Documents 
1-14-2005 
The Current Tax Status of Employer Education Assistance 
Linda Levine 
Congressional Research Service 
Bob Lyke 
Congressional Research Service 
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The Current Tax Status of Employer Education Assistance 
Keywords 
Tax, employer, education, assistance, income, federal, business, expense, gross income 
Disciplines 
Law | Tax Law 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/key_workplace/218 
1
 IRS regulations 1.162-5.  For additional information, see Your Federal Income Tax (IRS
publication 17) and Tax Benefits for Education (publication 970).
Congressional Research Service ˜ The Library of Congress
CRS Report for Congress
Received through the CRS Web
Order Code 97-243 EPW
Updated January 14, 2005
The Current Tax Status of 
Employer Education Assistance
Linda Levine and Bob Lyke
Domestic Social Policy Division
Summary
Section 127 of the Internal Revenue Code allows up to $5,250 in tuition
reimbursements and other forms of employer education assistance (e.g., books, supplies,
and equipment) to be exempt from income and employment taxes even if the education
does not qualify as a deductible business expense.  The Economic Growth and Tax
Relief Reconciliation Act of 2001 (P.L. 107-16) reinstated the exclusion for graduate-
level courses that begin after December 31, 2001.  As with many other provisions in that
legislation, the exclusion is extended only through December 31, 2010.
Taxable Employer Education Assistance
Except as discussed below, education assistance from employers generally must be
included in employees’ gross income for federal income tax purposes.  The amount is
reported on the W-2 statement that employees receive each January.  Employers typically
increase withholding for the additional income taxes employees owe.  The assistance also
is subject to Social Security and Medicare taxes, for which withholding is increased as
well, and to unemployment taxes paid only by employers.
Deductible Business Expense
Education assistance from employers can be tax-exempt if the education meets
Internal Revenue Service (IRS) tests for a deductible business expense.  Essentially, these
tests require that the education be job-related but not enable one to meet minimum
requirements for current work or prepare for a new career.  The tests consist of four
questions displayed on the flow chart below.1  Employer tuition reimbursements can be
excluded from employees’ gross income if the education meets the IRS tests and they are
provided through an accountable plan (i.e., employees are required to substantiate
reimbursements to their employer and return any excess payments).  If an accountable
plan does not exist, the assistance is included in employees’ gross income; however,
CRS-2
2
 For more information, see CRS Report RL31129, Higher Education Tax Credits and
Deduction:  An Overview of the Benefits and Their Relationship to Traditional Student Aid, by
Adam Stoll and James B. Stedman.
taxpayers who itemize their deductions may be able to deduct some portion, provided the
education meets the four-question IRS tests.  With some exceptions, such deductions are
limited to the amount that the assistance plus other miscellaneous deductions exceeds 2%
of adjusted gross income.  Thus, they might not offset all or even any of the expense.
            
Are Education Expenses Deductible?
Is the education needed to meet minimum 
educational requirements of taxpayer's trade or 
business?  
Is the education part of a study program that 
can qualify the taxpayer for a new trade or 
business?
Is the education required by the employer or 
by law to keep taxpayer's present salary, 
status, or job?
Does the education maintain or improve skills 
required in doing taxpayer's present work?
no
no
no
not
deductibl
 
e
yes 
yes 
deductible
yes 
 yes no
Employer Education Assistance Exclusion
Section 127 allows taxpayers to exclude from gross income up to $5,250 a year in
education assistance from their employer even if the education does not meet the above-
described IRS tests.  Courses do not have to be job-related; they can also help employees
meet minimum requirements for current work or prepare for a new career.  For the
exclusion to apply, employer education assistance programs must have separate written
plans, employee notification, and restrictions against favoring highly compensated
employees.  Education involving sports, games, or hobbies is not covered unless these
activities are the business of the employer or the courses are part of a degree program.
Graduate-level courses were not covered between June 30, 1996 and December 31,
2001.  P.L. 107-16 reinstated coverage for graduate-level courses beginning after
December 31, 2001.  It also extended the exclusion through December 31, 2010.
Taxpayers who receive employer education assistance not excluded or deducted as
described above might be eligible for either the Hope Scholarship credit, the Lifetime
Learning credit, or the tax deduction for higher education expenses.2
In January 2005, the Joint Committee on Taxation estimated that the tax expenditure
(i.e., the aggregate difference in tax liability) attributable to the exclusion for employer
education assistance will be approximately $0.8 billion in FY2005.


UNT Digital Library

1 IRS regulations 1.162-5.  For additional information, see Your Federal Income Tax (IRSpublication 17) and Tax Benefits for Education (publication 970).Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code 97-243 EPWUpdated January 14, 2005The Current Tax Status of Employer Education AssistanceLinda Levine and Bob LykeDomestic Social Policy DivisionSummarySection 127 of the Internal Revenue Code allows up to $5,250 in tuitionreimbursements and other forms of employer education assistance (e.g., books, supplies,and equipment) to be exempt from income and employment taxes even if the educationdoes not qualify as a deductible business expense.  The Economic Growth and TaxRelief Reconciliation Act of 2001 (P.L. 107-16) reinstated the exclusion for graduate-level courses that begin after December 31, 2001.  As with many other provisions in thatlegislation, the exclusion is extended only through December 31, 2010.Taxable Employer Education AssistanceExcept as discussed below, education assistance from employers generally must beincluded in employees’ gross income for federal income tax purposes.  The amount isreported on the W-2 statement that employees receive each January.  Employers typicallyincrease withholding for the additional income taxes employees owe.  The assistance alsois subject to Social Security and Medicare taxes, for which withholding is increased aswell, and to unemployment taxes paid only by employers.Deductible Business ExpenseEducation assistance from employers can be tax-exempt if the education meetsInternal Revenue Service (IRS) tests for a deductible business expense.  Essentially, thesetests require that the education be job-related but not enable one to meet minimumrequirements for current work or prepare for a new career.  The tests consist of fourquestions displayed on the flow chart below.1  Employer tuition reimbursements can beexcluded from employees’ gross income if the education meets the IRS tests and they areprovided through an accountable plan (i.e., employees are required to substantiatereimbursements to their employer and return any excess payments).  If an accountableplan does not exist, the assistance is included in employees’ gross income; however,CRS-22 For more information, see CRS Report RL31129, Higher Education Tax Credits andDeduction:  An Overview of the Benefits and Their Relationship to Traditional Student Aid, byAdam Stoll and James B. Stedman.taxpayers who itemize their deductions may be able to deduct some portion, provided theeducation meets the four-question IRS tests.  With some exceptions, such deductions arelimited to the amount that the assistance plus other miscellaneous deductions exceeds 2%of adjusted gross income.  Thus, they might not offset all or even any of the expense.            Are Education Expenses Deductible?Is the education needed to meet minimum educational requirements of taxpayer's trade or business?  Is the education part of a study program that can qualify the taxpayer for a new trade or business?Is the education required by the employer or by law to keep taxpayer's present salary, status, or job?Does the education maintain or improve skills required in doing taxpayer's present work?nonononotdeductibl eyes yes deductibleyes  yes noEmployer Education Assistance ExclusionSection 127 allows taxpayers to exclude from gross income up to $5,250 a year ineducation assistance from their employer even if the education does not meet the above-described IRS tests.  Courses do not have to be job-related; they can also help employeesmeet minimum requirements for current work or prepare for a new career.  For theexclusion to apply, employer education assistance programs must have separate writtenplans, employee notification, and restrictions against favoring highly compensatedemployees.  Education involving sports, games, or hobbies is not covered unless theseactivities are the business of the employer or the courses are part of a degree program.Graduate-level courses were not covered between June 30, 1996 and December 31,2001.  P.L. 107-16 reinstated coverage for graduate-level courses beginning afterDecember 31, 2001.  It also extended the exclusion through December 31, 2010.Taxpayers who receive employer education assistance not excluded or deducted asdescribed above might be eligible for either the Hope Scholarship credit, the LifetimeLearning credit, or the tax deduction for higher education expenses.2In January 2005, the Joint Committee on Taxation estimated that the tax expenditure(i.e., the aggregate difference in tax liability) attributable to the exclusion for employereducation assistance will be approximately $0.8 billion in FY2005.

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