Internal Revenue Code – Section 127

Sec. 127. Educational assistance programs

-STATUTE-

(a) Exclusion from gross income

(1) In general

Gross income of an employee does not include amounts paid or

expenses incurred by the employer for educational assistance to

the employee if the assistance is furnished pursuant to a program

which is described in subsection (b).

(2) $5,250 maximum exclusion

If, but for this paragraph, this section would exclude from

gross income more than $5,250 of educational assistance furnished

to an individual during a calendar year, this section shall apply

only to the first $5,250 of such assistance so furnished.

(b) Educational assistance program

(1) In general

For purposes of this section an educational assistance program

is a separate written plan of an employer for the exclusive

benefit of his employees to provide such employees with

educational assistance. The program must meet the requirements of

paragraphs (2) through (6) of this subsection.

(2) Eligibility

The program shall benefit employees who qualify under a

classification set up by the employer and found by the Secretary

not to be discriminatory in favor of employees who are highly

compensated employees (within the meaning of section 414(q)) or

their dependents. For purposes of this paragraph, there shall be

excluded from consideration employees not included in the program

who are included in a unit of employees covered by an agreement

which the Secretary of Labor finds to be a collective bargaining

agreement between employee representatives and one or more

employers, if there is evidence that educational assistance

benefits were the subject of good faith bargaining between such

employee representatives and such employer or employers.

(3) Principal shareholders or owners

Not more than 5 percent of the amounts paid or incurred by the

employer for educational assistance during the year may be

provided for the class of individuals who are shareholders or

owners (or their spouses or dependents), each of whom (on any day

of the year) owns more than 5 percent of the stock or of the

capital or profits interest in the employer.

(4) Other benefits as an alternative

A program must not provide eligible employees with a choice

between educational assistance and other remuneration includible

in gross income. For purposes of this section, the business

practices of the employer (as well as the written program) will

be taken into account.

(5) No funding required

A program referred to in paragraph (1) is not required to be

funded.

(6) Notification of employees

Reasonable notification of the availability and terms of the

program must be provided to eligible employees.

(c) Definitions; special rules

For purposes of this section -

(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.

(2) Employee

The term "employee" includes, for any year, an individual who

is an employee within the meaning of section 401(c)(1) (relating

to self-employed individuals).

(3) Employer

An individual who owns the entire interest in an unincorporated

trade or business shall be treated as his own employer. A

partnership shall be treated as the employer of each partner who

is an employee within the meaning of paragraph (2).

(4) Attribution rules

(A) Ownership of stock

Ownership of stock in a corporation shall be determined in

accordance with the rules provided under subsections (d) and

(e) of section 1563 (without regard to section 1563(e)(3)(C)).

(B) Interest in unincorporated trade or business

The interest of an employee in a trade or business which is

not incorporated shall be determined in accordance with

regulations prescribed by the Secretary, which shall be based

on principles similar to the principles which apply in the case

of subparagraph (A).

(5) Certain tests not applicable

An educational assistance program shall not be held or

considered to fail to meet any requirements of subsection (b)

merely because -

(A) of utilization rates for the different types of

educational assistance made available under the program; or

(B) successful completion, or attaining a particular course

grade, is required for or considered in determining

reimbursement under the program.

(6) Relationship to current law

This section shall not be construed to affect the deduction or

inclusion in income of amounts (not within the exclusion under

this section) which are paid or incurred, or received as

reimbursement, for educational expenses under section 117, 162 or

212.

(7) Disallowance of excluded amounts as credit or deduction

No deduction or credit shall be allowed to the employee under

any other section of this chapter for any amount excluded from

income by reason of this section.

(d) Cross reference

For reporting and recordkeeping requirements, see section

6039D.

 

-SOURCE-

(Added Pub. L. 95-600, title I, Sec. 164(a), Nov. 6, 1978, 92 Stat.

2811; amended Pub. L. 98-611, Sec. 1(a)-(c), (d)(3)(B), (e), Oct.

31, 1984, 98 Stat. 3176-3178; Pub. L. 99-514, title XI, Secs.

1114(b)(4), 1151(c)(4), (g)(3), 1162(a), Oct. 22, 1986, 100 Stat.

2450, 2503, 2507, 2510; Pub. L. 100-647, title I, Sec.

1011B(a)(31)(B), title IV, Sec. 4001(a), (b)(1), Nov. 10, 1988, 102

Stat. 3488, 3643; Pub. L. 101-140, title II, Sec. 203(a)(1), (2),

Nov. 8, 1989, 103 Stat. 830; Pub. L. 101-239, title VII, Secs.

7101(a)(1), 7814(a), Dec. 19, 1989, 103 Stat. 2304, 2413; Pub. L.

101-508, title XI, Sec. 11403(a), (b), Nov. 5, 1990, 104 Stat. 1388-

473; Pub. L. 102-227, title I, Sec. 103(a)(1), Dec. 11, 1991, 105

Stat. 1687; Pub. L. 103-66, title XIII, Sec. 13101(a)(1), Aug. 10,

1993, 107 Stat. 420; Pub. L. 104-188, title I, Sec. 1202(a), (b),

Aug. 20, 1996, 110 Stat. 1772, 1773; Pub. L. 105-34, title II, Sec.

221(a), Aug. 5, 1997, 111 Stat. 818; Pub. L. 106-170, title V, Sec.

506(a), Dec. 17, 1999, 113 Stat. 1922; Pub. L. 107-16, title IV,

Sec. 411(a), (b), June 7, 2001, 115 Stat. 63.)

 

 

-STATAMEND-

AMENDMENT OF SECTION

For termination of amendment by section 901 of Pub. L. 107-16,

see Effective and Termination Dates of 2001 Amendment note below.

 

 

-MISC1-

PRIOR PROVISIONS

A prior section 127 was renumbered section 140 of this title.

 

AMENDMENTS

2001 - Subsec. (c)(1). Pub. L. 107-16, Secs. 411(b), 901,

temporarily struck out before period at end ", and such term also

does not include any payment for, or the provision of any benefits

with respect to, any graduate level course of a kind normally taken

by an individual pursuing a program leading to a law, business,

medical, or other advanced academic or professional degree". See

Effective and Termination Dates of 2001 Amendment note below.

Subsecs. (d), (e). Pub. L. 107-16, Secs. 411(a), 901, temporarily

redesignated subsec. (e) as (d) and struck out heading and text of

former subsec. (d). Text read as follows: "This section shall not

apply to expenses paid with respect to courses beginning after

December 31, 2001." See Effective and Termination Dates of 2001

Amendment note below.

1999 - Subsec. (d). Pub. L. 106-170 substituted "December 31,

2001" for "May 31, 2000".

1997 - Subsec. (d). Pub. L. 105-34 amended heading and text of

subsec. (d) generally. Prior to amendment, text read as follows:

"This section shall not apply to taxable years beginning after May

31, 1997. In the case of any taxable year beginning in 1997, only

expenses paid with respect to courses beginning before July 1,

1997, shall be taken into account in determining the amount

excluded under this section."

1996 - Subsec. (c)(1). Pub. L. 104-188, Sec. 1202(b), in closing

provisions, inserted before period at end ", and such term also

does not include any payment for, or the provision of any benefits

with respect to, any graduate level course of a kind normally taken

by an individual pursuing a program leading to a law, business,

medical, or other advanced academic or professional degree".

Subsec. (d). Pub. L. 104-188, Sec. 1202(a), substituted "May 31,

1997. In the case of any taxable year beginning in 1997, only

expenses paid with respect to courses beginning before July 1,

1997, shall be taken into account in determining the amount

excluded under this section." for "December 31, 1994."

1993 - Subsec. (d). Pub. L. 103-66 substituted "December 31,

1994" for "June 30, 1992".

1991 - Subsec. (d). Pub. L. 102-227 substituted "June 30, 1992"

for "December 31, 1991".

1990 - Subsec. (c)(1). Pub. L. 101-508, Sec. 11403(b), struck out

at end "The term 'educational assistance' also does not include any

payment for, or the provision of any benefits with respect to, any

graduate level course of a kind normally taken by an individual

pursuing a program leading to a law, business, medical, or other

advanced academic or professional degree."

Subsec. (d). Pub. L. 101-508, Sec. 11403(a), substituted

"December 31, 1991" for "September 30, 1990".

1989 - Subsec. (b)(1). Pub. L. 101-140, Sec. 203(a)(1), amended

par. (1) to read as if amendments by Pub. L. 99-514, Sec.

1151(c)(4)(A), had not been enacted, see 1986 Amendment note below.

Subsec. (b)(2). Pub. L. 101-140, Sec. 203(a)(2), amended par. (2)

to read as if amendments by Pub. L. 100-647, Sec. 1011B(a)(31)(B),

had not been enacted, see 1988 Amendment note below.

Pub. L. 101-140, Sec. 203(a)(1), amended par. (2) to read as if

amendments by Pub. L. 99-514, Sec. 1151(g)(3), had not been

enacted, see 1986 Amendment note below.

Subsec. (b)(6). Pub. L. 101-140, Sec. 203(a)(1), amended par. (6)

to read as if amendments by Pub. L. 99-514, Sec. 1151(c)(4)(B), had

not been enacted, see 1986 Amendment note below.

Subsec. (c)(8). Pub. L. 101-239, Sec. 7814(a), struck out par.

(8) which read as follows: "Coordination with section 117(d). - In

the case of the education of an individual who is a graduate

student at an educational organization described in section

170(b)(1)(A)(ii) and who is engaged in teaching or research

activities for such organization, section 117(d)(2) shall be

applied as if it did not contain the phrase '(below the graduate

level)'."

Subsec. (d). Pub. L. 101-239, Sec. 7101(a)(1), substituted

"September 30, 1990" for "December 31, 1988".

1988 - Subsec. (b)(2). Pub. L. 100-647, Sec. 1011B(a)(31)(B),

substituted "there shall" for "there may" and "who are" for "who

may be" in last sentence.

Subsec. (c)(1). Pub. L. 100-647, Sec. 4001(b)(1), inserted at end

"The term 'educational assistance' also does not include any

payment for, or the provision of any benefits with respect to, any

graduate level course of a kind normally taken by an individual

pursuing a program leading to a law, business, medical, or other

advanced academic or professional degree."

Subsec. (d). Pub. L. 100-647, Sec. 4001(a), substituted "1988"

for "1987".

1986 - Subsec. (a)(2). Pub. L. 99-514, Sec. 1162(a)(2),

substituted "$5,250" for "$5,000" in heading and twice in text.

Subsec. (b)(1). Pub. L. 99-514, Sec. 1151(c)(4)(A), added par.

(1) and struck out former par (1) which read as follows: "For

purposes of this section an educational assistance program is a

separate written plan of an employer for the exclusive benefit of

his employees to provide such employees with educational

assistance. The program must meet the requirements of paragraphs

(2) through (6) of this subsection."

Subsec. (b)(2). Pub. L. 99-514, Sec. 1151(g)(3), substituted "For

purposes of this paragraph, there may be excluded from

consideration employees who may be excluded from consideration

under section 89(h)." for "For purposes of this paragraph, there

shall be excluded from consideration employees not included in the

program who are included in a unit of employees covered by an

agreement which the Secretary of Labor finds to be a collective

bargaining agreement between employee representatives and one or

more employers, if there is evidence that educational assistance

benefits were the subject of good faith bargaining between such

employee representatives and such employer or employers."

Pub. L. 99-514, Sec. 1114(b)(4), substituted "highly compensated

employees (within the meaning of section 414(q))" for "officers,

owners, or highly compensated,".

Subsec. (b)(6). Pub. L. 99-514, Sec. 1151(c)(4)(B), struck out

par. (6) which read as follows: "Notification of employees. -

Reasonable notification of the availability and terms of the

program must be provided to eligible employees."

Subsec. (d). Pub. L. 99-514, Sec. 1162(a)(1), substituted

"December 31, 1987" for "December 31, 1985".

1984 - Subsec. (a). Pub. L. 98-611, Sec. 1(b), amended subsec.

generally, substituting "Exclusion from gross income" for "General

rule" in heading, designating existing provision as par. "(1) In

general" and adding par. (2).

Subsec. (c)(7). Pub. L. 98-611, Sec. 1(e), substituted "allowed

to the employee" for "allowed".

Subsec. (c)(8). Pub. L. 98-611, Sec. 1(c), added par. (8).

Subsec. (d). Pub. L. 98-611, Sec. 1(a), substituted "December 31,

1985" for "December 31, 1983".

Subsec. (e). Pub. L. 98-611, Sec. 1(d)(3)(B), added subsec. (e).

 

EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT

Pub. L. 107-16, title IV, Sec. 411(d), June 7, 2001, 115 Stat.

63, provided that: "The amendments made by this section [amending

this section and former section 51A of this title] shall apply with

respect to expenses relating to courses beginning after December

31, 2001."

Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or

limitation years beginning after Dec. 31, 2012, and the Internal

Revenue Code of 1986 to be applied and administered to such years

as if such amendment had never been enacted, see section 901 of

Pub. L. 107-16, set out as a note under section 1 of this title.

 

EFFECTIVE DATE OF 1999 AMENDMENT

Pub. L. 106-170, title V, Sec. 506(b), Dec. 17, 1999, 113 Stat.

1922, provided that: "The amendment made by subsection (a)

[amending this section] shall apply to courses beginning after May

31, 2000."

 

EFFECTIVE DATE OF 1997 AMENDMENT

Section 221(b) of Pub. L. 105-34 provided that: "The amendment

made by subsection (a) [amending this section] shall apply to

taxable years beginning after December 31, 1996."

 

EFFECTIVE DATE OF 1996 AMENDMENT

Section 1202(c)(1), (2) of Pub. L. 104-188 provided that:

"(1) Extension. - The amendment made by subsection (a) [amending

this section] shall apply to taxable years beginning after December

31, 1994.

"(2) Graduate education. - The amendment made by subsection (b)

[amending this section] shall apply with respect to expenses

relating to courses beginning after June 30, 1996."

 

EFFECTIVE DATE OF 1993 AMENDMENT

Section 13101(c)(1) of Pub. L. 103-66 provided that: "The

amendments made by subsection (a) [amending this section and

repealing provisions set out below] shall apply to taxable years

ending after June 30, 1992."

 

EFFECTIVE DATE OF 1991 AMENDMENT

Section 103(b) of Pub. L. 102-227 provided that: "The amendment

made by this section [amending this section] shall apply to taxable

years beginning after December 31, 1991."

 

EFFECTIVE DATE OF 1990 AMENDMENT

Section 11403(d) of Pub. L. 101-508 provided that:

"(1) In general. - Except as provided in paragraph (2), the

amendments made by this section [amending this section and

repealing provisions set out below] shall apply to taxable years

beginning after December 31, 1989.

"(2) Subsection (b). - The amendment made by subsection (b)

[amending this section] shall apply to taxable years beginning

after December 31, 1990."

 

EFFECTIVE DATE OF 1989 AMENDMENTS

Section 7101(c) of Pub. L. 101-239 provided that: "The amendments

made by this section [amending this section and section 132 of this

title] shall apply to taxable years beginning after December 31,

1988."

Amendment by section 7814(a) of Pub. L. 101-239 effective, except

as otherwise provided, as if included in the provision of the

Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,

to which such amendment relates, see section 7817 of Pub. L. 101-

239, set out as a note under section 1 of this title.

Amendment by Pub. L. 101-140 effective as if included in section

1151 of Pub. L. 99-514, see section 203(c) of Pub. L. 101-140, set

out as a note under section 79 of this title.

 

EFFECTIVE DATE OF 1988 AMENDMENT

Amendment by section 1011B(a)(31)(B) of Pub. L. 100-647

effective, except as otherwise provided, as if included in the

provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which

such amendment relates, see section 1019(a) of Pub. L. 100-647, set

out as a note under section 1 of this title.

Amendment by section 4001(a), (b)(1) of Pub. L. 100-647

applicable to taxable years beginning after Dec. 31, 1987, see

section 4001(c) of Pub. L. 100-647, set out as a note under section

117 of this title.

 

EFFECTIVE DATE OF 1986 AMENDMENT

Amendment by section 1114(b)(4) of Pub. L. 99-514 applicable to

years beginning after Dec. 31, 1987, see section 1114(c)(2) of Pub.

L. 99-514, set out as a note under section 414 of this title.

Amendment by section 1151(c)(4), (g)(3) of Pub. L. 99-514

applicable, with certain qualifications and exceptions, to years

beginning after Dec. 31, 1988, see section 1151(k) of Pub. L. 99-

514, as amended, set out as a note under section 79 of this title.

Amendment by section 1162(a) of Pub. L. 99-514 applicable to

taxable years beginning after Dec. 31, 1985, see section 1162(c) of

Pub. L. 99-514, set out as a note under section 120 of this title.

 

EFFECTIVE DATE OF 1984 AMENDMENT

Section 1(g) of Pub. L. 98-611, as amended by Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

"(1) In general. - Except as otherwise provided in this

subsection, the amendments made by this section [enacting section

6039D of this title and amending this section and sections 125,

3231, and 6652 of this title] shall apply to taxable years

beginning after December 31, 1983.

"(2) Subsection (d). - The amendments made by subsection (d)

[enacting section 6039D and amending this section and sections 125

and 6652 of this title] shall take effect on January 1, 1985.

"(3) Subsection (f). - The amendment made by subsection (f)

[amending section 3231 of this title] shall apply to remuneration

paid after December 31, 1984.

"(4) No penalties or interest on failure to withhold. - No

penalty or interest shall be imposed on any failure to withhold

under subtitle C of the Internal Revenue Code of 1986 [formerly

I.R.C. 1954] (relating to employment taxes) with respect to amounts

excluded from gross income under section 127 of such Code (as

amended by this section and determined without regard to subsection

(a)(2) thereof) with respect to periods during 1984.

"(5) Coordination with section 117(d). - In the case of education

described in section 127(c)(8) of the Internal Revenue Code of

1986, as added by this section, section 117(d) of such Code shall

be treated as in effect on and after January 1, 1984."

 

EFFECTIVE DATE

Section 164(d) of Pub. L. 95-600 provided that: "The amendments

made by this section [enacting this section and amending sections

3121, 3306, and 3401 of this title and section 409 of Title 42, The

Public Health and Welfare] shall apply with respect to taxable

years beginning after December 31, 1978."

 

REGULATIONS

Secretary of the Treasury or his delegate to issue before Feb. 1,

1988, final regulations to carry out amendments made by section

1114 of Pub. L. 99-514, see section 1141 of Pub. L. 99-514, set out

as a note under section 401 of this title.

 

EXPEDITED PROCEDURES FOR REFUNDS OF OVERPAYMENTS

Section 1202(c)(3) of Pub. L. 104-188 provided that: "The

Secretary of the Treasury shall establish expedited procedures for

the refund of any overpayment of taxes imposed by the Internal

Revenue Code of 1986 which is attributable to amounts excluded from

gross income during 1995 or 1996 under section 127 of such Code,

including procedures waiving the requirement that an employer

obtain an employee's signature where the employer demonstrates to

the satisfaction of the Secretary that any refund collected by the

employer on behalf of the employee will be paid to the employee."

 

SPECIAL RULE FOR CERTAIN TAXABLE YEARS

Section 103(a)(2) of Pub. L. 102-227 provided that, in the case

of any taxable year beginning in 1992, only amounts paid before

July 1, 1992, by employer for educational assistance for employee

be taken into account in determining amount excluded under this

section with respect to such employee for such taxable year, prior

to repeal by Pub. L. 103-66, title XIII, Sec. 13101(a)(2), Aug. 10,

1993, 107 Stat. 420.

Section 7101(a)(2) of Pub. L. 101-239 provided that, in the case

of any taxable year beginning in 1990, only amounts paid before

Oct. 1, 1990, by employer for educational assistance for employee

be taken into account in determining amount excluded under this

section with respect to such employee for such taxable year, prior

to repeal by Pub. L. 101-508, title XI, Sec. 11403(c), Nov. 5,

1990, 104 Stat. 1388-473.

 

NONENFORCEMENT OF AMENDMENT MADE BY SECTION 1151 OF PUB. L. 99-514

FOR FISCAL YEAR 1990

No monies appropriated by Pub. L. 101-136 to be used to implement

or enforce section 1151 of Pub. L. 99-514 or the amendments made by

such section, see section 528 of Pub. L. 101-136, set out as a note

under section 89 of this title.

 

PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989

For provisions directing that if any amendments made by subtitle

A or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or

title XVIII [Secs. 1800-1899A] of Pub. L. 99-514 require an

amendment to any plan, such plan amendment shall not be required to

be made before the first plan year beginning on or after Jan. 1,

1989, see section 1140 of Pub. L. 99-514, as amended, set out as a

note under section 401 of this title.

 

-End-