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It’s just a small paragraph in the U.S. Internal Revenue Service code called Section 127. What it essentially says is that, currently, employees can be reimbursed by their employer for up to $5,250 per year for educational expenditures – and it will be tax-free.
Any amount over $5,250 paid for non-work related educational assistance is considered income and is subject to income tax. However, work-related educational assistance is not taxable in any amount.
But as with all things regarding taxes, it’s not that simple. First, this section was added to the IRS code in 1978, but had an expiration date in 1983. Fortunately, it has been extended in various time increments until 2010. Currently, there is a bill that would permanently extend the code, but it has spent the year in a House committee.
An always changing law
And therein lies much of the problem for employers who must administer the code for employees’ W-2 forms. This rule has never been firmly established – and at least once the law has been retroactive when the code was reinstated after a break in 1995. At one time, the tax exemption only applied to undergraduate work: Graduate courses were taxable. Today, all work-related courses, both undergraduate and graduate, are exempt from taxes under Section 127. All educational assistance for less than $5,250 is tax-free.
Because of the instability of the code, many employers in the past have been uncertain how to apply it for their employees. The law’s on-again, off-again status added tax complexity for both employers and employees.
And those were the companies who knew about the code and its changes. Many employers aren’t that versed on IRS code and don’t know the Section 127 benefits or have established policies for them.
Two different calendars and other ways your taxes are affected
Because of different administrative policies at the State of Ohio, the IRS and various schools, several scenarios can unexpectedly affect UET participants.
While your UET benefit is based on the state fiscal year (July1st – June 30th), taxes are determined on the calendar year (January 1st – December 31st).
This can affect the accounting for the $5,250 total. Just because a bargaining unit member doesn’t exceed that amount in a Union Education Trust fiscal year – the year that the benefit is available – doesn’t mean that he or she wouldn’t exceed it in another way because of the two different calendars. Here are some scenarios…:
Scenario #1: I take a course in May 2007, which is UET fiscal year 2007, using $3,000 in UET benefits. Then, I take a course in August 2007, which is UET fiscal year 2008, and receive another $3,000 for it paid by UET. Each UET fiscal year, I’ve only used $3,000 of my benefit. However, both were accounted for in tax year 2007 and total $6,000, well over the $5,250 tax-free limit. I will be taxed on $750.
Additionally, school administrative procedures also impact what calendar year the educational assistance is accounted for. That’s because the taxable total is based on when the invoices for the vouchers are paid, not when the vouchers are issued. In other words, it all depends on when the school sends its bill.
Scenario #2: I get a voucher for $3,000 in Sept. 2007, and a second voucher for $3,000 in Sept. 2008. But the two schools have different invoicing procedures: The first school holds my Sept. 2007 voucher until the course is complete and submits it to UET in January 2008. The second school submits my voucher quickly to UET – it comes in November 2008, soon after the last day of withdrawal from the courses without penalty. So, although both were issued in different fiscal years and different calendar years, because of administrative procedures at the schools, they end up getting paid out in the same tax, or calendar, year. And they total $6,000, again over the tax-free limit.
And there’s one more thing to remember: The taxable educational assistance amount is not only for benefits received from the UET. It also includes any assistance from state agencies.
Scenario #3: I used $3,000 of my UET benefit in 2007. My agency reimbursed me $3,000 for tuition. You got it – I now have a total of $6,000 and I’ve exceeded the tax-free limit again.
These scenarios illustrate why it was important to the UET to give bargaining unit employees control over their educational benefits and the implications for potential tax liability. UET provides the tools to designate and verify the courses that are work related.
This never-constant IRS law with its quirky applications set the stage for the challenge that many bargaining unit members faced last fall when the tax was applied to all UET participants. Read on!
Download and print the Educational Benefit Tax Exemption Form
Download and print the FAQ Sheet & Flowchart