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Taxes--Background on Permanent Section 127 Extension Internal Revenue Code Section 127 Employer-Provided Education Assistance Benefits
As part of the "Economic Growth and Tax Relief Reconciliation Act of 2001," which was signed into law by the President on June 7, 2001, Section 127 of the Internal Revenue Code was extended permanently for both graduate and undergraduate courses, beginning January 1, 2002. This benefit enables employers to assist workers to further their education at a cost of up to $5,250 per year without tax, either to the employer (who may deduct the expense), or to the employee. Background: Previously, employee educational assistance benefits were available tax-free under Section 127 of the Internal Revenue Code for undergraduate courses only, beginning after June 30, 1996. This provision of the tax law was set to expire December 31, 2001. First enacted in 1978 as a trial program with an expiration date of December 31, 1983, the tax-free status of employer-paid tuition benefits had, until this year, received ten short-term extensions. Originally, eligibility for the benefit was restricted to study below the graduate level. This restriction was removed in 1990 and the benefit was made available for graduate as well as undergraduate study from 1990 through 1995. However, under the Small Business Job Protection Act of 1996, graduate study was again made ineligible for the benefit, to limit the revenue loss from the provision. The Association of American Universities strongly advocated for the restoration of graduate study under this benefit. As the United States economy has become increasingly information- and technology-based, the importance of continuing education has increased. Those who benefit from restoration of graduate study under this benefit include students in fields where graduate study is a necessity, such as nursing, education and social work. Many of these professions are not highly compensated, and indeed, non-discrimination rules elsewhere in the tax law ensure that Section 127 benefits are fairly distributed to all employees, not just highly compensated ones. Although the Lifelong Learning credit enacted in 1997 provides tax benefits for education beyond the undergraduate level, the maximum benefit is limited to 20 percent of the first $5,000 per year, and is not sensitive to family size. For example, parents with a child in college who were also continuing their own education could not use the new Lifelong Learning credit for their own education, and could not use Section 127 if their education was beyond the undergraduate level. Updated by the Association of American Universities, June 2001
Association of American Universities |