A popular tax code provision for employer tuition reimbursement is set to expire on December 31, 2012 along with other Bush-era tax provisions enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
Specifically, Internal Revenue Code (“Code”) Section 127 currently permits employers to provide a tax-free reimbursement of up to $5,250 annually per employee, for the cost of tuition, books, and class supplies or equipment required for any undergraduate or graduate course of studies, whether or not the course of studies is related to the employee’s current job. Thus, someone employed as an engineer could receive the maximum reimbursement amount towards law school tuition, for instance, or a registered nurse could be reimbursed for a portion of medical school costs.
This is contrasted with tuition expenses reimbursed as a “working condition fringe benefit” of employment under Code Section 132(d). There is no dollar limit on such expenses however they are reimbursable only if the course or degree is related to the employee’s current job – e.g., it maintains or improves skills needed in the employee’s current job — or is expressly required by the employer or by law. Unlike working condition fringe benefits, which need only be documented through proof of tuition payment, tuition reimbursement programs under Code Section 127 must be set forth in a written plan document, and must be designed so as not to discriminate in favor of highly compensated employees.
Section 127 was originally enacted in 1978 for a five-year period ending in 1983, but like a cat with nine lives its expiration date has been extended nine separate times, most recently under EGTRRA in 2001. It is currently set to expire along with EGTRRA and JGTRRA tax cuts on December 31, 2012. It is generally acknowledged that Congress will not act to extend the cuts before the presidential election in November. It is possible that some agreement to extend the tax cuts will be reached after the election, particularly for popular, partisan-neutral provisions such as Code Section 127.
Additionally, Representatives Sam Johnson (R-TX) and Richard Neal (D-MA) introduced a bill in March 2012 that would make Section 127 a permanent part of the tax code. The bill, titled the “Employee Educational Assistance Act of 2012,”went to the House Ways and Means Committee back in March and has not surfaced on the legislative radar since then. I am tracking the bill and will continue to keep readers posted with its progress, if any, and with any budget negotiations that may resuscitate Section 127 for another multi-year stint.