One of the great perks of working at a private educational institution\u2014university, college, or independent school\u2014is the tuition remission for employees and their families. You know how expensive school tuition has become. So tuition remission can save you a ton of money. Even better, most school employees don\u2019t have to pay income taxes on the discount for themselves or their family members.<\/p>\n
Let\u2019s take a step back and review one policy underlying our income tax system. It is this: anything of value given to an employee by an employer is taxable income. Employers cannot give gifts to their employees. Well, they can, but no matter what the motivation, the value, the fair market value, of that \u201cgift\u201d is supposed to be reported by the employer to the IRS and to the employee. And the employee pays income taxes on it\u2014unless there\u2019s a tax break<\/p>\n
Happily, tuition remission programs enjoy an excellent tax break. Section 117 of the Internal Revenue Code is entitled \u201cQualified Scholarships.\u201d Section 117(d) is called \u201cQualified Tuition Reduction.\u201d 117(d) is short and clear, \u201cGross income shall not include any qualified tuition reduction.\u201d A qualified tuition reduction means any reduction in tuition provided to an employee (or spouse or dependent child) at the employing educational institution or at another educational institution.<\/p>\n
However, and this is what I am here to point out to you: the tax benefits of qualified tuition reduction apply to highly compensated employees only if the reduction does not discriminate in favor of the highly compensated employee. For 2020, a highly compensated employee is someone who earns more than $130,000.<\/p>\n
It is not uncommon for senior executives of educational institutions to get a better tuition remission deal than other employees\u2014it is sometimes called \u201cpreferred financial aid.\u201d For example, most people get 50% of their children\u2019s tuition remitted, but the head of school or president gets full remission, 100%, for her children.<\/p>\n
That\u2019s a discriminatory policy.<\/p>\n
What are the consequences?<\/p>\n
The tax break, the exclusion from taxable income, doesn\u2019t apply for a highly compensated employee who receives a more favorable discriminatory reduction.<\/p>\n
You might think that the Head of School or the President would owe income taxes on the difference between the remission provided to rank and file employees the remission provided to her children. That makes sense.<\/p>\n
But that\u2019s not the law. Section 117 says that the reduction will not apply in that case, so no reduction, no tax break, income taxes are owed on the entire amount of the remitted tuition.<\/p>\n
This rule is relatively obscure. Mostly, discriminatory tuition reduction arrangements are not spotted. Not by the CFO and, surprisingly, not by the school\u2019s outside accountants and auditors. That can be partially explained by the failure to report anything about remission programs, on the assumption that they are universally tax exempt, and the failure of the auditors and accountants to ask. As a result, when it is discovered by an alert auditor or CFO, the error may have been going on for years.<\/p>\n
If you have a tuition remission program that might be discriminatory, you should check with your CFO, accountants, auditors, or legal counsel. The consequences to the beneficiaries of the discriminatory plan, the senior-most executives at your school, may find themselves owing tens of thousands of dollars in unanticipated income taxes and interest.<\/p>\n","protected":false},"excerpt":{"rendered":"
One of the great perks of working at a private educational institution—university, college, or independent school—is the tuition remission for employees and their families. You know how expensive school tuition has become. So tuition remission can save you a ton of money. Even better, most school employees don’t have to…<\/p>\n","protected":false},"author":106,"featured_media":1079,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false,"_links_to":"","_links_to_target":""},"categories":[62],"tags":[17,287,353],"class_list":["post-1552","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-taxes","tag-discrimination","tag-taxes","tag-tuition-remission"],"acf":[],"yoast_head":"\n