Tuition reimbursed by an employer may qualify as a Federal income tax-free benefit if one of two Code sections applies. A program is a separate written plan of an employer for the exclusive benefit of its employees to provide educational assistance. Payments under a program will qualify for favorable Federal income tax treatment even though successful completion, or achieving a certain grade is required for reimbursement under the program. Also, payments that qualify for exclusion from Federal income tax under Code Section 127 are not subject to Federal income tax withholding or employment taxes.
Educational assistance covers the employees' tuition, fees, books, supplies and equipment.
However, it does not include payments for tools or supplies which the employee may retain after the conclusion of the course, meals, lodging, or transportation. It also does not include the costs of courses relating to sports, games, or hobbies, unless such education involves the business of the employer or is required as part of a degree program. It further does not include any payments relating to any graduate level course of a kind normally taken by an individual pursing a program leading to a law, business, medical, or other advanced academic or professional degree. Code Section 127 is well known as one of those provisions in the Federal tax law that is permitted by Congress to expire and subsequent to expiration, reenacted with retroactive effect. Under current law, the exclusions available under Code Section 127 will not apply to expenses paid with respect to courses beginning after May 31, 2000.