Tuition Reimbursement: Catch-22 for Employers
About 750,000 workers who aim to advance their careers through continuing education may be in for an unpleasant surprise.
The federal tax law that makes employer-provided tuition reimbursement a nontaxable benefit expired at the end of 1994 and, thanks to the budget impasse in Washington, it was never revived.
That means that literally hundreds of companies that reimburse workers for continuing education, ranging from Berlitz courses to law school, are legally bound to report subsidized tuition payments as taxable income to the workers.
The end result: If you received such reimbursements, there is a fair chance that the taxable income on your W-2 statement has been boosted to account for the education subsidy, which can amount to as much as $5,250 per year. That can cause you to pay hundreds--even thousands--of dollars more in income and employment taxes in 1995, an unpleasant fact you may not discover until you file your 1995 return.
Moreover, if the law is reinstated retroactively, as it has been seven times in the past, you may have to file two federal income tax returns this year--the regular one and an amended return, in which you request that the government return money you overpaid. Separately, your employer will have to apply for a refund of overpaid Social Security and Medicare taxes on your behalf. A whole series of corporate documents will have to be fixed too.
“When this law expires, it just creates a major mess,” says Matthew Hamill, vice president of the Washington-based National Assn. of Independent Colleges and Universities.
Specifically, the employer needs to give a corrected W-2 to the employee. The employee then takes that and files an amended tax return to get a refund. Getting a refund of FICA taxes, which are also overpaid when the tuition assistance is considered income, gets more complicated. Usually, the employer needs to front the refund money to the employee; the employee needs to sign a document saying he or she received it, so the employer can go to the Social Security Administration to get the money back.
This exact scenario was played out in 1992, when this same provision expired and was revived retroactively in late 1993.
Irene Chapman, payroll director for Transamerica Corp. in Los Angles, was at Pillsbury Co. when the so-called Section 127 income exclusion expired in 1992, setting in motion the previously mentioned series of amendments and refund claims.
“Our employees were as confused as we were,” she grouses. “This back-and-forth business is an administrative nightmare.”
Nonetheless, it is one that occurs with some regularity because this portion of the U.S. Tax Code is what some experts call a “Lazarus law.” It dies and is brought back to life with regularity.
According to Commerce Clearing House, an Illinois-based publisher of tax information, the portion of the Tax Code that makes tuition reimbursements of up to $5,250 annually nontaxable expired in June 1992; in December 1991; in September 1990; and in December 1988, ‘87, ’85 and ’83. Each time it was retroactively reinstated, says Mark Luscombe, principal federal tax analyst at CCH.
All this puts employers in an uncomfortable Catch-22, says Rita Zeidner, manager of government relations at the American Payroll Assn. They must comply with the law even though they know it is likely to change within a matter of months--and even though they know compliance is likely to cause confusion and irritation all around.
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Already, there are congressional efforts afoot to tag reinstatement of Section 127 on to a temporary spending bill that could be voted on as early as this week. However, worker W-2s--in which employers report your income and withholding to both you and the IRS--were due last month. Some employers complied with the law, others may not have because they assumed the provision would be retroactively reinstated, Zeidner says. If your company breaks the law and it’s reinstated, you’re in a better position than if it complies.
To make matters even more complicated, not all tuition assistance falls under the aegis of Section 127. Some are simply not taxable because they’re considered “job-related.” They are consequently considered a reimbursed business expense--such as business mileage--not taxable to the worker and deductible to the company. The definition of job-related education, however, is largely subjective and up to the company to determine.
The IRS says tuition is not job related if it qualifies you for a new job--so most graduate programs, whether for law school or an MBA--would fall under Section 127 and be taxable this year. However, many undergraduate programs from remedial math to foreign language courses might be nontaxable job-related expenses in the right circumstances. The class must simply help maintain or improve the skills you need for your current job. What exactly does that include? That’s up to your employer to decide.
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If You Were Reimbursed . . .
What should you do if your employer reports your tuition reimbursement payment as income?
* Argue. Try to have your courses reclassified as job-related expenses and get an amended W-2 statement as proof. That removes you from the uncertainty of the on-again, off-again Section 127 and shifts you into the more solid arena of simple business expense reimbursements.
* Delay. If the tuition can’t be reclassified as job-related, consider a delay in filing your tax return. That gives the government more time to revive 127 and could save you the trouble of filing an amended return. You can legally procrastinate by filing a request for an automatic extension--Form 4868--which gives you an additional four months to file a return. However, you must estimate the amount of tax you owe and send that amount with the extension request.
* Deal with it. When all else fails, you may simply have to deal with it. File your return, including the tuition reimbursement income, pay your tax, and then hope for a refund later if 127 is retroactively revived.
