Fate of Employer Tuition Assistance Programs Hangs in the Balance

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December 8, 2017

On December 2, the Senate passed a version of the Tax Cuts and Jobs Act that differed in key respects from the House bill passed several weeks prior.  Notably, the House bill would eliminate the exclusion of up to $5,250 from an employee’s wages for qualified educational assistance under Code section 127 (discussed here), but the Senate bill would leave the exclusion in place.  While headlines address the more high-profile differences between the bills (e.g., the new corporate tax rate and the repeal of the ACA’s individual mandate), a number of large employers, including a number of our clients, have expressed concern about the fate of tuition assistance programs, as they view it as an important benefit for their employees.  This backlash is unsurprising, given that the Society for Human Resource Management (SHRM) estimates that over 60% of employers offer some form of tuition assistance.

The fate of the tuition assistance exclusion, as well as all other areas in which the House and Senate bills disagree, now rests with the conference committee.  The Senate bill also retains the exclusion for qualified tuition reductions provided by educational institutions that the House bill would eliminate, representing another education benefit that the conference committee will need to address.  The conference committee is tasked with reconciling the differences between the two bills, and it is expected that the process will conclude within the next one to two weeks.  Conference committees are notoriously unpredictable, making it difficult to anticipate the fate of the tuition assistance provision, particularly with many of the details of the final legislation in flux.  Though several major employers, as well as SHRM, have vocalized objections to the House bill’s proposed repeal, public criticism of a possible repeal has not been as strong as some had anticipated, a fact that could influence policymakers.

Educational Benefits that Qualify for Exclusion as Working Condition Fringe Benefits

Notably, neither version of the Bill would affect the ability of employees to exclude education benefits that qualify as working condition fringe benefits from taxable wages under Code section 132(d).  Working condition fringe benefits include any property or services that would have been deductible by an employee as a business expense had the employee paid for it his or herself.  Some employers have questioned whether the suspension of miscellaneous itemized deductions under Code section 67 under the Senate bill and the new Code section 262A that would be added by the House bill disallowing deductions for unreimbursed business expenses would eliminate the exclusion for working condition fringes because the expenses would no longer be deductible under Code section 162 by the employee if the employee had paid them directly.  The House bill directly addresses this by amending Code section 132(d) to specify that it is determined without regard to Code section 262A.  Although the Senate bill is silent, the change to section 67 would not seem to affect working condition fringes as the exclusion is currently applied without regard to the 2% of adjusted gross income floor that section 67 applies under current law.

Many employers offer educational benefits that qualify for exclusion as a working condition fringe benefit because the benefits are limited to education that maintains or improves job skills or meets requirements for the employee to remain in his or her current position.  One example would be a program under which the employer pays for continuing education courses for medical professional, lawyers, and accountants.  Education benefits that qualify as working condition fringes are more flexible than under Code section 127 because there is no dollar limit and a written plan is not required.  Travel and lodging expenses incurred as part of attending courses can also qualify for exclusion.