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Tax Code

Section 127 Tuition Assistance Programs (not limited to employees of educational institutions)

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. In order for the plan to be qualified, a number of different requirements must be met:

* The benefit must be offered on a non-discriminatory basis that does not favor highly compensated employees.

* Reasonable notification of the availability and terms of the program must be provided to eligible employees.

* There must be a separate written plan for the program.

* The program may only be for the benefit of employees (including retired, disabled or laid off employees), and not for the benefit of the employee's spouse or children, and

* The plan cannot offer the employee a choice of taxable income or educational assistance.

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. The amendment made by the law struck the language that prohibited payment for "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." 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.