Employee Tuition Assistance Program

Summary

This template is an employer program designed to provide financial assistance to eligible employees to pursue educational opportunities on a tax-favored basis, in accordance with I.R.C. § 127. This template includes practical guidance, drafting notes, and alternate and optional clauses. Section 127 educational assistance programs are a common tax-favorable benefit policy offered by employers. The statutory requirements (set forth below) permit a great deal of flexibility in program design, including the ability to restrict assistance only to coursework that is likely to improve a participant's skills, knowledge, or credentials that relate to their role or anticipated roles within the sponsoring company or to offer assistance for a broader range of educational opportunities, in any form of instruction or training that improves or develops the capabilities of an individual. The basic requirements for a Section 127 program are: • The employer must adopt a separate written plan • Benefits must consist of educational assistance in the form of the employer's payment of relevant expenses or provision of education o The program may not include assistance for (1) tools or supplies (other than textbooks) that the employee may retain after completing a course; (2) meals, lodging, or transportation; or (3) unless an exception applies, education involving sports, games, or hobbies • Recipients of assistance are limited to employees (and certain deemed employees) or former employees • The program cannot discriminate by design in favor of highly compensated employees (under I.R.C. § 414(q)) or their dependents • The program cannot be offered as an option in lieu of compensation or other taxable benefits • Not more than 5% of the benefits paid or incurred under the program for any year can benefit a class of individuals who are 5% owners • Eligible employees must be notified of the program • Participants must substantiate their expenses • Benefits provided during any year (provided on a non-taxable basis) are limited to $5,250 I.R.C. § 127; Treas. Reg. §§ 1.127-1, 1.127-2. Unfunded Section 127 programs are not considered to be employee welfare plans subject to the Employee Retirement Income Security Act (ERISA). 29 C.F.R. § 2510.3-1(k). Payments made pursuant to the terms of the plan are not taxable (I.R.C. § 127) and are not subject to withholding taxes or Form W-2 reporting. I.R.C. §§ 3121(a)(18), 3401(a)(18), 6051; Treas. Reg. § 31.6051-1. In addition to any benefit provided under a Section 127 plan, the working condition fringe benefit rules under I.R.C. § 132 also permit employers to furnish educational benefits to eligible employees on a tax-free basis. Treas. Reg. § 1.162-5. Although these rules allow for more generous tax-favored benefits than Section 127 programs (there is no cap), the type of instruction that may be covered is extremely narrow. A Section 132 working condition educational assistance program may only cover instruction that will maintain or improve skills required in the employee's trade or business or that meets express requirements (imposed by the company or applicable law) to maintain their position, status, or compensation. No other coursework can qualify, including instruction to meet the requirements of their current position or to prepare them for a different trade or business. Eligible expenses are limited to costs that could be deducted as a business expense deduction. These programs are also more administratively burdensome since they require closer tracking of expenses under the IRS accountable plan rules. For more information, see Fringe Benefit Rules (IRC § 132) and Accountable Plan Rules for Business Expense Reimbursements. This template is a reimbursement-based Section 127 educational assistance program. Such programs may also provide benefits in the form of direct payments of eligible expenses or direct instruction by the employer or a third party. For a discussion of the American Opportunity and Lifetime Learning Credits available to individuals, see I.R.C. 25A and Lexis Tax Advisor -- Federal Topical § 1F:17.01. For a discussion regarding the treatment of scholarships on the individual level, see I.R.C. § 117, COMMENT: THE FEDERAL TAX SYSTEM AND TREATMENT OF SCHOLARSHIPS FOR GRADUATE STUDENTS: SHOULD SCHOLARSHIPS BE TAXED?, 48 St. Louis L.J. 1501; and 1A-1A:7 Lexis Tax Advisor -- Federal Topical § 1A:7.05. For more information, see Education-Assistance Policies: Key Drafting Tips, Lexis Tax Advisor -- Federal Topical § 1B:4B.14, "Employer-Provided Educational Assistance," and IRS, Publication 15-B, Employer's Tax Guide to Fringe Benefits.