3.7 Education Assistance Plans

If your employer pays for job-related courses, the payment is tax free to you provided that the courses do not satisfy the employer’s minimum education standards and do not qualify you for a new profession. If these tests are met, the employer’s education assistance is a tax-free working condition fringe benefit (3.9).

Even if not job related, your employer’s payment for courses before 2013 is tax free up to $5,250, provided the assistance is under a qualifying Section 127 plan meeting nondiscriminatory tests. Graduate courses qualify for the exclusion as well as undergraduate courses. The Section 127 exclusion covers tuition, fees, books, and equipment, plus supplies that you cannot keep at the end of the course. Lodging, meals, and transportation are not covered by the exclusion. Sports or hobby-type courses qualify only if the courses are related to your business or are required as part of a degree program.

Tuition reductions.

Employees and retired employees of educational institutions, their spouses, and their dependent children are not taxed on tuition reductions for undergraduate courses provided the reduction is not payment for teaching or other services. However, an exclusion is allowed for tuition reductions under the National Health Services Corps Scholarship Program and the Armed Forces Health Professions Scholarship Program despite the recipient’s service obligation. Widows or widowers of deceased employees or of former employees also qualify. Officers and highly paid employees may claim the exclusion only if the employer plan does not discriminate on their behalf. The exclusion applies to tuition for undergraduate education at any educational institution, not only the employer’s school.

Graduate students who are teaching or research assistants at an educational institution are not taxed on tuition reductions for courses at that school if the tuition reduction is in addition to regular pay for the teaching or research services or the reduction is provided under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship Program. The graduate student exclusion for tuition reductions applies only to teaching and research assistants, and not to faculty or other staff members (or their spouses and dependents) who take graduate courses and also do research for or teach at the school. However, if the graduate courses are work related, a tuition reduction for faculty and staff may qualify as a tax-free working condition fringe benefit (3.9).