Qualified Tuition Reduction Programs

by Sheldon Gilman, Esq., Past President Ohio Valley Region USCJ

A qualified tuition reduction program is an arrangement that permits employees of an educational institution to reduce their taxable income for amounts allocated for educational expenses. The IRS, in an unpublished ruling, indicated that an educational institution that is operated as an activity of a tax exempt organization described in Internal Revenue Code º501 (c)(3) (see Footnote #1) may qualify as an "educational organization" for purposes of sponsoring a qualified tuition reduction program even though such activity is not separately organized or incorporated (see Footnote #2).

Internal Revenue Code º117 contains the provisions that explain a qualified tuition reduction program, and this Code section permits an income tax reduction; that is, an exclusion from taxable income, for tuition expenses provided to an employee of an educational institution. The tuition reduction must be for the employee's own education or the education of a person related to the employee. For example, benefits from a qualified tuition reduction may be provided to active or retired employees, and their spouses and their dependent children.

A qualified tuition reduction is excludable from gross income only if the tuition reduction is made available on substantially the same terms to each employee, and the arrangement does not discriminate in favor of officers, owners or highly compensated employees.

A qualified tuition reduction program can provide benefits by one educational organization with respect to attendance at another educational organization. The Internal Revenue Code provides that the benefits of a qualified tuition reduction program would apply "at such organization or at another educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on..." (see Footnote #3). The Internal Revenue Service has not issued declarative guidance as to how one institution would mechanically accomplish the reduction from compensation from one institution to the payment of benefits at another institution; hence, we recommend that before you install a qualified reduction program you seek guidance from competent tax counsel.

Footnotes

1. A "501 (c)(3)" organization is an organization which is organized and operated exclusively for religious, charitable, scientific,…literary, or educational purposes, ...no part of the net earnings of which inures to the benefit of any private... individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation..., and which does not participate in... any political campaign on behalf of (or in opposition to) any candidate for public office.
2. The IRS stated: "For example, an unincorporated school conducted as an activity of a church, parish, synod, diocese, or other exempt religious corporation would qualify as an "educational organization' for this purpose."
3. See Internal Revenue Code ºº117 (d)(2) and 170 (b)(1)(A)(ii).