Employer-provided educational assistance refers to educational expenses, such as courses, tuition, and books, that are paid for either directly by the employer or indirectly through reimbursement to employees. Under section 127 of the IRC, the amount for educational assistance that employees receive from their employers is generally excludable from employees’ gross income. Generally, the assistance may be for any type of course, except those related to sports, games, or hobbies, and covers such expenses as tuition, books, supplies, and equipment. Section 127 went into effect in 1979 with passage of the Revenue Act of 1978. Three major reasons for the enactment of section 127 were cited in a June 1988 Department of the Treasury report: (1) to reduce the complexity of the tax system, (2) to reduce possible inequities among taxpayers, and (3) to provide opportunities for upward mobility for less educated individuals. This report also explained that prior law required individuals to pay income taxes on the amount paid for training for new jobs or occupations if an employer had paid for it, a situation that was considered inequitable for those least able to pay but most in need of the education. Since section 127 was first authorized, it has expired and has been extended eight times. Several changes were made by these extensions, including setting an annual limit on the amount that can be excluded from employees’ gross income (currently $5,250) and establishing an annual reporting requirement (Form 5500). Based on our 1989 report which noted an absence of data on the use of employer-provided educational assistance, IRS developed Schedule F to supplement Form 5500. This form and schedule require employers to report information on (1) the number of employees eligible for such assistance, (2) the number of employees who received such assistance, and (3) the value of the assistance provided. The series of expirations and extensions of section 127 has contributed to problems with the quality of available IRS data. For example, the 1993 extension was not enacted until several months after section 127 had expired and the tax filing year had ended. Companies experienced uncertainty about how and whether to report educational assistance as employee income and withhold taxes from it. Some companies included assistance in employees’ income and withheld taxes, others did not. Ultimately, the extension was passed retroactively, which resulted in those companies that had reported the assistance as employee income having to refile employee wage statements and tax returns. Because of this, IRS has acknowledged that some employers may not have filed the required IRS forms, thus information about section 127 reported to IRS may not be complete. However, IRS officials told us that they believe most employers complied with the reporting requirements during the last expiration period. Aside from section 127, three tax provisions generally determine the tax treatment of educational assistance: Section 117—Qualified Scholarships; Section 132—Certain Fringe Benefits; and Section 62(a)(2)(A)—Reimbursed Expenses of Employees. Under section 117, educational assistance provided by qualified educational institutions to employees and their dependents can be excluded from employees’ gross income. Under section 132, employees can exclude employer-provided educational assistance from their gross income if it qualifies as a working condition fringe benefit. A working condition fringe benefit is any property or service an employer provides to an employee that, had the employee paid for such property or services, the employee could deduct the payment from his/her income as a business expense. Under section 62, employees can exclude educational assistance from their income if the assistance is provided as part of an employer’s “accountable plan,” which requires that assistance be business-related, expenses be documented, and employees be required to return any excess payments. These three provisions do not have a dollar limit on the amount of assistance that can be excluded. Otherwise, employer-provided educational assistance must be included in employees’ gross income. Under certain conditions, however, employees may deduct educational assistance that has been included in their income. Decisions as to whether such assistance included in an employee’s gross income can be deducted depend on whether the assistance qualifies as a business expense under section 162 of the IRC. Section 162 discusses the circumstances under which an employer’s educational assistance expenses are related to an employee’s job and therefore are deductible. It allows individuals who itemize deductions on their tax returns to deduct qualifying job-related educational expenses and other miscellaneous itemized deductions from gross income. Moreover, qualifying educational expenses and other miscellaneous itemized deductions are deductible only to the extent that they exceed 2 percent of the individual’s adjusted gross income. Figure 1 illustrates an IRS aid to assist taxpayers in determining whether educational expenses are deductible. Does the education maintain or business? job? work? Our objectives were to provide information about (1) employer-provided educational assistance, including the characteristics of employers providing educational assistance and employees eligible for and receiving it, and (2) other tax provisions related to employer-provided educational assistance and how they differ from section 127. To achieve the first objective, we identified and obtained relevant data. We did this by contacting the IRS, searching the Internet to identify relevant organizations and research, and contacting various associations. Because no one source of information provided comprehensive data, we used available data from a variety of sources. We relied primarily on data from Form 5500 and Schedule F, provided to us by IRS, and data from NPSAS to develop our profile of employers and employees. We also used information about the eligibility of employees for educational assistance from BLS reports on employee benefits. The IRS data consisted of information about employers providing educational assistance and employees eligible for and receiving section 127 assistance. Employers reported this information to IRS on Form 5500 and its Schedule F for 1992 through 1994. IRS provided us with a database of these employer returns for 1992 and 1993, and for 1994 returns filed with IRS through May 31, 1996, which IRS officials told us represented 90 percent of the data it expects to receive from employers for 1994. We used these data to develop information about employer characteristics, such as how many programs employers have that offered educational assistance and employer size. We also used these data to identify the number of employees eligible for and receiving this assistance and the dollar amount of the assistance provided. NPSAS data consisted of information about postsecondary student aid, including section 127 assistance, from postsecondary students, their parents, and educational institutions. The Department of Education’s National Center for Education Statistics (NCES) conducted this national study for the academic year 1992 to 1993 and compiled the results in the NPSAS database. We obtained the NPSAS database from the NCES and used the data primarily to develop information on characteristics of employees, such as their level and type of education. The BLS reports contained estimated data about employee eligibility for educational assistance. This information was collected by BLS as part of its surveys on employee benefits in small, medium, and large private establishments. These reports were done over a 2-year period: the survey of employee benefits in medium and large private establishments covered 1993, and the survey of employee benefits in small private establishments covered 1994. We did not verify the validity or reliability of the data collected by IRS or the other agency study sponsors. Because of the series of expirations and extensions of section 127, some employers may not have filed Form 5500 and Schedule F with IRS as required. Further, not all employers who filed provided all required data on Form 5500 and Schedule F. For example, of the employer returns that reported providing educational assistance, 65 percent reported the amount of assistance in 1992; 74 percent, in 1993; and 80 percent, in 1994. Appendix II includes a list of employer and employee characteristics and the percentage of returns that reported this information for 1992, 1993, and 1994. In addition, the analyses generated from each of the three different data sources cannot be compared with one another because of variations in data collection methods, definitions, populations covered, and periods covered. Appendix II explains in detail the data sources we used including populations covered, sampling errors as appropriate, and data limitations. To obtain additional information about the databases and the results of our analyses of them, we interviewed officials from the Department of the Treasury, IRS, the Department of Education, and BLS. We also interviewed officials from selected associations, including the National Association of Independent Colleges and Universities, the American Payroll Association, the American Society for Training and Education, and the Institute for Higher Education Policy. To achieve the second objective, we reviewed relevant sections of the IRC, and IRS and Department of the Treasury rulings and regulations pertaining to those sections. We also interviewed officials from the Department of the Treasury, IRS, and selected associations. We did not evaluate the effectiveness of section 127 in promoting employee skills as it was beyond the scope of this assignment. We did our work from April through July 1996 in accordance with generally accepted government auditing standards. We obtained comments on a draft of this report from IRS. These comments are discussed at the end of this report. According to IRS, for each of the 3 years we reviewed, employers filed over 3,200 returns that reported information about educational assistance they provided their employees under section 127. IRS officials believe that this number included most of the employers who provided section 127 assistance but note that some employers may not have filed because of confusion resulting from the series of section 127 expirations and extensions. The employers included auto manufacturers, hospitals and medical centers, utilities, telecommunications and electronics companies, banks, and other types of businesses. The dollar amount of educational assistance employers reported increased steadily for the 3-year period we reviewed. It increased from $525.3 million for 1992 to $691.3 million for 1994. This increase may be related to the increase in the percent of employers who reported the amount of assistance to IRS for the 3-year period. For 1992, the first year IRS required employers to report data on Schedule F of Form 5500, employers filed 3,556 returns, 65 percent of which (2,294) reported the amount of educational assistance they provided employees.