Impending Change in Tax Treatment of Educational Assistance Programs

December 2012

There is an impending change in the tax treatment of educational assistance programs under which an employer pays, or reimburses, an employee for up to $5,250 in educational assistance under a written plan of the employer. As you may be aware, the educational assistance an employer provides to an employee pursuant to an educational assistance program established under Section 127 of the Internal Revenue Code is not taxable to an employee under the current tax law. However, this beneficial tax treatment is currently set to expire on December 31, 2012.

We note that this beneficial tax treatment has previously expired, and Congress has previously reinstated it - so it is possible that Congress may act to continue the $5,250 beneficial tax treatment. We also note that even if the beneficial tax treatment under Code Section 127 is not extended, under certain circumstances educational assistance may be continued to be provided on a tax-free basis if the arrangement meets the standards of other parts of Code - such as the working condition fringe rules. Finally, please keep in mind that even if your program's benefits no longer qualify for tax-free treatment, the Internal Revenue Code does not prohibit you from offering an educational program benefit to your employees. Rather, if such a program is offered, you must simply make sure to report the benefit as a taxable benefit to the employee. Employers should make sure that that if they continue to offer these programs in 2013, and the Section 127 exclusion rules are not ultimately extended, the program benefits are reported as taxable, to the extent required.