Student Loan Reimbursement

[JoshinNC]

I am a little weak in this area, so I'll explain what I do know and maybe one of you fine ladies or gentlemen can assist me.

If an employee is in school and actively employed the employer can pay tuition reimbursement to the employee up to $5250 per year without it being taxable to the employee.

What if the employee is already finished with school and is the employer wants to pay part of their student loans. Does this qualify for the exclusion or is this taxable income to the employee? Is there a way to bypass taxability of these payments?

Thanks in advance!

[Armando Beaujolais]

Good question.

Code 127 says that "educational assistance" is "the payment...of expenses incurred by or on behalf of an employee for education..."

I didn't see anything in the Code or Pub 15-B that addresses timing or making a loan repayment vs. direct reimbursement for expenses. I did find this snippet in Revenue Ruling 8714035 about a student who had some loans forgiven by a college:

"...In addition, the information submitted by you does not contain any indication that the College had intended these debt discharges to be part of a separate written plan of the employer to be treated as an "educational assistance program" for its employees. The discharge of the debt that you owed to the College did not provide "educational assistance" to you that would meet the requirements of section 127 of the Code..."

In that ruling it seems that a loan discharge was not considered a qualified educational expense because there was not a written plan.

As long as all the other requirements are met, I don't see any reason why payment of a student loan would fail to be a qualified expense. There are no rules for timing of accounting for the payments, such as with Hope or LLC, etc.

[Unregistered]

Thanks Buddy,

I will review the code section and publications cited tomorrow. Thanks again,

JoshInNC

[Black Bart]

Don't know much about history, don't know beans about

maybe one of you fine...gentlemen can assist me.

student liens; but I do like a compliment, and that's the nicest one that I've been sent...

[OldJack]

student liens; but I do like a compliment, and that's the nicest one that I've been sent...

And just what makes you think he was complimenting you? I believe the word was gentlemen. That leaves me out.

[Black Bart]

Speak for yourself

. That leaves me out.

You Bootheel boys: Always wantin' somebody to show you stuff. Just take him at his word without probing too much.

[JoshinNC]

You are all wonderful people

I gleen more from this board in a week than I did in an entire semester in college.

I greatly appreciate all the information that is shared, and the witty banter that goes along with it.

Keep up the great work!

[Unregistered]

Armando

I'm NOT saying your interpretation is wrong but §127(c) which defines educational assistance leads me to believe that loan forgiveness was not envisioned in the legislation. (The phrase "not limited to" is certainly open to question but quite frankly, I don't see that as allowing the loan)

(1) Educational assistance
The term ''educational assistance'' means -
(A) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), and
(B) the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment), but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term ''educational assistance'' also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.

In your citation of PLR 8714035 (not a RR) the IRS gave a number of reasons for disallowance including the "lack of written plan". I don't think you can necessarily argue the converse - that is, a written plan makes it ok. I think the full text of the PLR needs to be considered.

New York Enrolled Agent

[Armando Beaujolais]

Armando

I'm NOT saying your interpretation is wrong but §127(c) which defines educational assistance leads me to believe that loan forgiveness was not envisioned in the legislation. (The phrase "not limited to" is certainly open to question but quite frankly, I don't see that as allowing the loan)

(1) Educational assistance
The term ''educational assistance'' means -
(A) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment), and
(B) the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment), but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term ''educational assistance'' also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.

In your citation of PLR 8714035 (not a RR) the IRS gave a number of reasons for disallowance including the "lack of written plan". I don't think you can necessarily argue the converse - that is, a written plan makes it ok. I think the full text of the PLR needs to be considered.

New York Enrolled Agent

I agree that just because a ruling doesn't specifically say "No," that's not a sound basis on which to say it means "Yes."

In this case, in the limited research I did, I couldn't find anything that specifically addressed whether repayment of a student loan is considered qualified educational assistance. When you can't find a citation that specifically addresses the issue you're looking at (which happens often in this biz), then you have to look at clues and make an educated guess.

The clues I looked at were (1) there's nothing in the statute that addresses timing of payments, (2) there's nothing in the statute that addresses manner of payment, and (3) I took the Revenue Ruling to imply that loan forgiveness could be qualified educational assistance, since the ruling cited "lack of a written plan" for disallowing it. If the loan forgiveness would not potentially qualify to begin with, they would never have had to go past that point to look at a whether there was a written plan.

It also seems this is a situation that would be quite common. If education expenses to pay student loans didn't qualify, you'd think that would be clearly stated in the Pubs.

It's Mr. Mustard in the Library with the Candlestick.

[OldJack]

I was waiting for someone like New York Enrolled Agent to disagree as I have not had experience with student loans being paid off by an employer. Also, I don't want Black Bart thinking that I always just disagree to be ornery.

I tend to think New York is right as paying off a loan just doesn't seem like paying education expenses to me. I would expect that if an employer paid off a student loan it would be taxable income to the employee.

P.S. I expect the major portion of student loans are spent for living expenses and not qualified education expenses. At any rate, I believe the loan proceeds are not usually restricted to paying just education expenses.

[jainen]

I like the argument

I like the argument and hope somebody takes it to the line so we can all benefit. It seems to me, however, that loan repayment is not an educational expense. If you never repay the loan, that won't have any effect on the education at all. The direct expenses paid with loan proceeds were already eligible for credits or deductions, so this is kind of double-dipping.

[Bill Tubbs]

more details?

What if the employee is already finished with school and is the employer wants to pay part of their student loans. Does this qualify for the exclusion or is this taxable income to the employee? Is there a way to bypass taxability of these payments?

Was the individual already employed by this employer when the classes started? If not, I would say payment of student loan would be taxable benefit.

But, if already employed, perhaps the arrangement was more like the "if you take a course, then we'll pay for it IF you pass", or "if you get a degree, we'll pay for it". Maybe the individual, having to first pay the tuition out-of-pocket, had to take out a student loan. Then when the employer reimburses the individual, the money goes toward the student loan (either directly or non-directly), the payment would be a deferred payment of tuition and related expenses. This I could certainly see as a valid exclusion of income. But, if student originally took a credit/deduction for tuition paid, that would have to be undone.
>>What if the employee is already finished with school<<
Off-hand, doesn't sound like this paragraph would work for your situation, but I thought I would throw it out there, just in case.

Bill

[JoshinNC]

No, she was not already an employee.

That would have made things easier, as I would have just advised the business owner to pay for the tuition, up to the annual limit.

The client is a medical office, the employee is a PA, newly married, just starting out. She wants to reduce her monthly expenses and asked the doc who owns the practice if he would help out. He will, but we wants to find the best avenue for doing so. The doc could gift to her $12,000 a year to cover student loan payments, she would pay no tax on the gift, but the doc wouldn't get a tax deduction. The doc could pay her a bonus, gross up the bonus amount to cover the taxes, she has no out of pocket expenses, but the doc is paying unneccesary amounts for FUTA, SUTA, etc.

I'm going to do a little more research, as I am 50/50 on the tuition assistance angle. I definately agree that if she took Hope or LLC during school that it would be double dipping, and would be shot down. But, I also agree with Armando that if it weren't allowable the question of whether there was a plan would be mute.

I'll let everyone know what we decide.

Thanks!

[JoshinNC]

Eureka!

I think I found my answer. In the Revenue Ruling sited by Armando there is the following statement:

"The discharge by the College of indebtedness that was incurred by you during the years 1981-1983 did not take place until the years 1984-1986. The discharge was conditioned only upon your being employed on a full-time basis by the College and its effect is simply to reduce the amount of your outstanding liabilities just as could be accomplished if additional compensation was paid to you in the form of cash and you repaid the loans. When the discharges took place the College was not providing educational assistance to you to obtain your Master's Degree since that had already been completed well prior to any discharge. The debt discharge does not provide a specific incentive to you to continue your education. In addition, the information submitted by you does not contain any indication that the College had intended these debt discharges to be part of a separate written plan of the employer to be treated as an “educational assistance program” for its employees. The discharge of the debt that you owed to the College did not provide “educational assistance” to you that would meet the requirements of section 127 of the Code. "

I read that to say that since the discharge occurred after the degree was obtained it is includable in gross income.

Agree?

[Armando Beaujolais]

I think I found my answer. In the Revenue Ruling sited by Armando there is the following statement:

"The discharge by the College of indebtedness that was incurred by you during the years 1981-1983 did not take place until the years 1984-1986. The discharge was conditioned only upon your being employed on a full-time basis by the College and its effect is simply to reduce the amount of your outstanding liabilities just as could be accomplished if additional compensation was paid to you in the form of cash and you repaid the loans. When the discharges took place the College was not providing educational assistance to you to obtain your Master's Degree since that had already been completed well prior to any discharge. The debt discharge does not provide a specific incentive to you to continue your education. In addition, the information submitted by you does not contain any indication that the College had intended these debt discharges to be part of a separate written plan of the employer to be treated as an “educational assistance program” for its employees. The discharge of the debt that you owed to the College did not provide “educational assistance” to you that would meet the requirements of section 127 of the Code. "

I read that to say that since the discharge occurred after the degree was obtained it is includable in gross income.

Agree?

Yup, that's the way I'm reading it too, looking more closely.

I think the person who wrote the ruling was shooting from the hip and pulling things out of thin air, but it does read that it's includable.

"...just as could be accomplished if additional compensation was paid to you in the form of cash..."

What? If that was a deciding factor, you could throw out every tax favored benefit there is.

"...The debt discharge does not provide a specific incentive to you to continue your education..."

Out of thin air. There's nothing in the 127 code or regs saying anything about reasons for the education, compared to, say, deductible business education.

I see all sorts of random excuses in that ruling that don't have any coherence or solid basis in the Code. But it reads as it reads.