Employer-Provided Education Benefits: Section 132(d) Is Worth a Second Look

EXECUTIVE SUMMARY * MANY EMPLOYERS PROVIDE EMPLOYEES WITH TAX-FREE education benefits. The two most common are scholarships and grants under IRC section 117 and education-assistance programs under section 127. There is, however, a third alternative: CPAs can recommend using the condition fringe of IRC section 132(d). * SCHOLARSHIPS UNDER SECTION 117(a) ARE TAX-FREE if the recipient is a degree candidate at a qualified education institution and uses the funds for tuition, fees, books, supplies and equipment required for instruction. If the scholarships represent payments for past, present or future employment services, the employee must include them in income. * SECTION 127 ALLOWS EMPLOYERS TO OFFER up to $5,250 annually per employee in tax-free education help as long as the benefits are provided by reason of their employment relationship. This covers graduate as well as undergraduate education but requires a formal written plan that must be open to everyone. These plans can be costly and burdensome for employers to administer. * UNDER SECTION 132(d) EMPLOYERS CAN OFFER a tax-free condition fringe for any expense employees can deduct on their own tax returns under IRC section 162. This typically includes travel, meals and professional dues but also can include education that maintains or improves job skills or meets requirements for the employee to remain in his or her current position. * PROVIDING EDUCATION BENEFITS UNDER SECTION 132(d) is a good idea for employers because no written plan is required and there is no dollar limit on benefits. It is possible for employers to provide benefits under several different code sections at the same time. In general, though, section 132(d) is the most flexible alternative. Most employers consider their employees an important investment both to accomplish the organization's current goals and to have the right people in place for the future. Companies look to hire the best and the brightest and then give them the experience and education they need to advance through the ranks. Along with irreplaceable on-the-job experience, many experts have identified formal education as an important way to improve skills and gain knowledge and exposure to new ideas. Employers have several tax-free options available to encourage workers to take advantage of education opportunities. The two most common are scholarships and grants under IRC section 117 and education-assistance programs under section 127. While both help employees, section 127 imposes dollar limits, and both plans bring administrative burdens on employers. A third alternative, part of the working condition fringe benefit of IRC section 132(d), receives little fanfare but provides the most flexibility with the fewest administrative headaches. This article offers CPAs the information they need to understand the options and counsel employers on the best alternatives for paying employee education expenses. SCHOLARSHIPS AND GRANTS Despite their popularity, scholarships and grants come with some restrictions. To exclude them from income under section 117(a), the recipient must be a degree candidate at a qualified education institution and use the funds for tuition, fees, books, supplies and equipment required for instruction. Employers have some leeway as to the type of recipient; they may establish scholarships for employees, their spouses and children or even others not associated with the company, such as residents of the community where the company is located. However, when the scholarships are for an employee, CPAs should recommend caution to prevent the funds from becoming taxable. According to Treasury regulations section 1.117-4(c), if an employer pays for an employee's study or research, and those amounts represent payments rot past, present or future employment services, the employee must include them in his or her income. …