Educational
Assistance Programs
Section 127 of the Internal Revenue
Code
Section 127
(a) Exclusion From Gross Income.
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Gross income of
an employee does not include amounts paid or expenses incurred by the
employer for educational assistance to the employee if the assistance is
furnished pursuant to a program which is described in Subsection (b).
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(2)
$5,250 Maximum Exclusion.
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If, but for
this Paragraph, this Section would exclude from gross income more than
$5,250 of educational assistance furnished to an individual during a
calendar year, this Section shall apply only to the first $5,250 of such
assistance so furnished.
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(b) Educational Assistance Program.
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For purposes of
this Section, an educational assistance program is a plan of an employer
for the exclusive benefit of his employees to provide such employees with
educational assistance. The program must meet the requirements of
paragraphs (2) through (6) of this Subsection.
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The program
shall benefit employees who qualify under a classification set up by the
employer and found by the Secretary not to be discriminatory in favor of
employees who are highly compensated employees (within the meaning of
Section 414(q)) or their dependents. For purposes of this Paragraph, there
shall be excluded from consideration employees not included in the program
who are included in a unit of employees covered by an agreement which the
Secretary of Labor finds to be a collective bargaining agreement between
employee representatives and one or more employers, if there is evidence
that educational assistance benefits were the subject of good faith
bargaining between such employee representatives and such employer or
employers.
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(3)
Principal Shareholders Or Owners.
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Not more than 5
percent of the amounts paid or incurred by the employer for educational
assistance during the year may be provided for the class of individuals
who are shareholders or owners (or their spouses or dependents), each of
whom (on any day of the year) owns more than 5 percent of the stock or of
the capital or profits interest in the employer.
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(4)
Other Benefits As An Alternative.
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A program must
not provide eligible employees with a choice between educational
assistance and other remuneration includible in gross income. For purposes
of this Section, the business practices of the employer (as well as the
written program) will be taken into account.
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A program
referred to in Paragraph (1) is not required to be funded.
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(6)
Notification Of Employees.
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Reasonable
notification of the availability and terms of the program must be provided
to eligible employees.
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(c) Definitions; Special Rules.
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For purposes of
this Section--
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(1)
Educational Assistance.
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The term
"educational assistance" means--
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(A)
the payment, by an employer, of expenses
incurred by or on behalf of an employee for education of the employee
(including, but not limited to, tuition, fees, and similar payments,
books, supplies, and equipment), and
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(B)
the provision, by an employer, of courses
of instruction for such employee (including books, supplies, and
equipment), but does not include payment for, or the provision of, tools
or supplies which may be retained by the employee after completion of a
course of instruction, or meals, lodging, or transportation. The term
"educational assistance" also does not include any payment
for, or the provision of any benefits with respect to, any course or
other education involving sports, games, or hobbies , and such term also
does not include any payment 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.
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The term
"employee" includes, for any year, an individual who is an
employee within the meaning of Section 401(c)(1) (relating to
self-employed individuals).
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An individual
who owns the entire interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be treated as the
employer of each partner who is an employee within the meaning of
Paragraph (2).
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Ownership of
stock in a corporation shall be determined in accordance with the rules
provided under subsections (d) and (e) of Section 1563 (without regard to
Section 1563(e)(3)(C)).
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(B)
Interest In Unincorporated Trade Or
Business.
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The interest of
an employee in a trade or business which is not incorporated shall be
determined in accordance with regulations prescribed by the Secretary,
which shall be based on principles similar to the principles which apply
in the case of Subparagraph (A).
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(5)
Certain Tests Not Applicable.
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An educational
assistance program shall not be held or considered to fail to meet any
requirements of Subsection (b) merely because--
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(A)
of utilization rates for the different types
of educational assistance made available under the program; or
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(B)
successful completion, or attaining a
particular course grade, is required for or considered in determining
reimbursement under the program.
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(6)
Relationship To Current Law.
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This Section
shall not be construed to affect the deduction or inclusion in income of
amounts (not within the exclusion under this Section) which are paid or
incurred, or received as reimbursement, for educational expenses under
Section 117, 162 or 212.
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(7)
Disallowance Of Excluded Amounts As
Credit Or Deduction.
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No deduction or
credit shall be allowed to the employee under any other Section of this
chapter for any amount excluded from income by reason of this Section.
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(d) Termination.
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This Section
shall not apply to expenses paid with respect to courses beginning after
May 31, 2000.
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(e) Cross Reference
For reporting and recordkeeping requirements, see
Section 6039D.
(Added Pub. L. 95-600, Title I, Section 164(a), Nov. 6, 1978, 92 Stat. 2811, and
amended Pub. L. 98-611, Section 1(a)-(c), (d)(3)(B), (e), Oct. 31, 1984, 98
Stat. 3176-3178; Pub. L. 99-514, Title XI, Section 1114(b)(4), 1151(c)(4),
(g)(3), 1162(a), Oct. 22, 1986, 100 Stat. 2450, 2503, 2507, 2510; Pub. L.
100-647, Title I, Section 1011B(a)(31)(B), Title IV, Section 4001(a), (b)(1),
Nov. 10, 1988, 102 Stat. 3488, 3643; Pub. L. 101-140, Title II, Section
203(a)(1), (2), Nov. 8, 1989, 103 Stat. 830; Pub. L. 101-239, Title VII, Section
7101(a)(1), 7814(a), Dec. 19, 1989, 103 Stat. 2304, 2413; Pub. L. 101-508, Title
XI, Section 11403(a), (b), Nov. 5, 1990, 104 Stat. 1388-473; Pub. L. 102-227,
Title I, Section 103(a), Dec. 11, 1991, 105 Stat. 1686; Pub. L. 103-66, Title
XIII, Section 13101(a), Aug. 10, 1993, 107 Stat. 312; Pub. L. 104-188, Title I,
Section 1202(a) and (b), Aug. 20, 1996, 110 Stat. 1755; Pub. L. 105-34, Title
II, Section 221(a), Aug. 5, 1997, 111 Stat 788.)
Last updated:
03-04
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