September 23, 2022
TAX FILE MEMORANDUM
From: Theodore Kittle, Caleb Welsh, Cameron Holquist, Carter Herchenbach
Subject: Camden Ash
Engagement Research Conclusions
Summary of Facts
Camden Ash is the employee benefits manager for a start-up software development firm, Skyline, Inc. Camden is considering offering two new education assistance benefits to employees. The first would be a tuition reimbursement program to reimburse employees for $6,000 of college tuition each year after they provide proof of completion of the courses during the year. The second would be a college loan payment program, to pay $6,000 of college student loan debt each year for employees who have already obtained a college degree.
Research Issues
Is any portion of the $6,000 tuition reimbursement or college school loan debt not taxable to the employee if the program is started in 2022? What are the special requirements, if any, to qualify for tax exemptions? Can the company provide both the tuition reimbursement benefit and the college school loan repayment benefit to the same employee in one year? If so, what are the tax
consequences to the employee?
Law and Analysis
According to Section 63 of the Internal Revenue Code, taxable income means gross income minus allowable deductions, or the standard deduction. However, in Section 127 of the Internal Revenue Code, there is an allowable exclusion from gross income of up to $5,250 for amounts paid or expenses incurred by the employer for educational assistance if the program is compliant with certain regulations. Section 127(c)(1) defines both the tuition reimbursement and student loan debt payment programs as “educational assistance.” Section 127(a)(2) also explains that if both programs were to be offered to the employee, the exclusion “shall apply only to the first $5,250 of such assistance”. For the program to be eligible, it must comply with Section 127(b)(2) which explains employees who have collectively bargained through an employee representative would not be included in the program. If being offered to individuals who are considered shareholders or owners who own more than 5 percent of the stock or capital, Section 127(b)(3) forbids more than 5 percent of the amounts paid by the employer for educational assistance to go to owners or shareholders. Section 127(b)(4) further explains the requirements for the program and how the program must not be offered as a choice between educational assistance “
and other remuneration includible in gross income”.
Conclusions
The Tuition Reimbursement Program and the Loan Payment program would be considered educational assistance and subject to a maximum of $5,250 even if both programs are offered.
Dear Camden Ash,
This letter is in response to confusion regarding the tax consequences to your employees if you offer either of these two education assistance benefits. The facts of this case are that you would
like to offer one of two education assistance benefits. One of them is the Tuition Reimbursement
Program, and the other is a College School Loan Payment Program, which will both offer $6,000 for courses post-completion and loan payments for a college degree already acquired.
