A Win-Win
Written by Mark Fitzgerald
MAE 2010 Volume: 5 issue: 6 (August)
IRS Section 127 Allows Employers to Offer Up to $5,250
Each Year in Tax-Free Tuition Assistance to Employees.
For over 30 years the Employee Educational Assistance Act has made it possible for employees to access tax-free educational assistance from participating employers for such expenses as tuition, fees and books. This tax benefit is scheduled to expire at the end of the year.
But thanks to Representatives Sam Johnson (R–Texas) and Earl Pomeroy (D–N.D.), new legislation that would make the tax benefit, Internal Revenue Code Section 127, permanent for both graduate and undergraduate course work is currently in the pipeline.
In June, the lawmakers introduced the Employee Educational Assistance Act of 2010, H.R. 5600. Under Section 127, which was enacted in 1978, employers can offer up to $5,250 each year in tax-free tuition assistance to employees. The money is also deductible to the employer and free from FICA taxes.
“Employees are asked to do more for their jobs,” said Johnson. “While companies can’t always pay people a higher salary, they can offer better benefits. It’s exciting to know that companies want to invest in their employees with tuition assistance. It’s a win-win situation. For America to remain competitive with India and China, investing in our future work force is a must.” Senator Chuck Grassley (R–Iowa) agrees. He is also working on legislation, S. 2851, that would make Section 127 permanent.
COMPETITIVENESS
According to the National Association of Independent Colleges (NAICU), over 913,000 students received employer-provided benefits, compared to 431,500 in 1992. Almost one in five individuals using this education expense benefit is pursuing a degree in the sciences, technology, engineering and mathematics (STEM) disciplines where the U.S. comparatively lags behind in intellectual and experiential wherewithal.
In 2006, former President George W. Bush introduced the American Competitiveness Initiative to address shortfalls in federal government support of educational development and progress at all academic levels in the STEM fields. The initiative also called for increases in federal funding for advanced research and development programs as well as an increase in higher education students that graduate with degrees in STEM disciplines.
“We must continue to lead the world in human talent and creativity. Our greatest advantage in the world has always been our educated, hardworking, ambitious people—and we’re going to keep that edge,” said Bush in introducing the initiative. “I propose to double the federal commitment to the most critical basic research programs in the physical sciences over the next 10 years. This funding will support the work of America’s most creative minds as they explore promising areas such as nanotechnology, supercomputing and alternative energy sources.”
JOINING FORCES
Together with the Society for Human Resource Management, NAICU is advancing a coalition focused on Section 127. A big part of the advocacy effort is to rebuild the coalition that was formed to promote the passage of similar bill in 2001. More than 100 organizations have joined the coalition to uphold the tax provision. Coalition representatives include 50-some private colleges, NAICU member presidents, various leaders in higher education, K-12 groups, manufacturing, labor unions and other stakeholders.
“Legislation to permanently extend Section 127 and reinstate the provision for graduate-level educational assistance is extremely important as the U.S. strives to compete in an ever-increasing global market,” the coalition wrote in a letter addressed to Senator Grassley and the Senate Finance Committee. “Competition in this global environment requires employers to ensure that their employees have the greatest level of current technical and educational skills necessary to meet the challenges that they face. More and more often, employees are finding that a graduate-level degree is necessary for them to succeed in this environment.”
And what a difficult environment it has turned out to be. Only about 20 percent of recent college graduates have been able to find jobs after graduation. What’s more, the unemployment rate for those who are 20 to 24 has doubled over the last three years and is 50 percent higher than that of the overall population, according to the Bureau of Labor Statistics.
“Over the next decade this trend will intensify, as American workers will need some post-secondary education and training to keep pace with rapid changes in the workplace and the applications of technology in their jobs,” the coalition predicted. “Yet employees that choose to participate in an employer-provided educational assistance plan, balance their work and educational lives, and labor toward a graduate degree are taxed on the value of that benefit. At a time when the need for highly skilled workers with advanced degrees was debated in the last Congress, it is unfortunate that the one provision that encourages an employee to achieve a graduate degree is not even a part of the Internal Revenue Code.”
According to NAICU, the military provides the largest amount (about $2,547) of average assistance to undergraduates, while colleges and universities offer the largest average assistance (about $3,277) to graduate students. Three years ago, the association estimated that those earning $42,711 represented the average person accepting the employer-provided assistance.
The Employee Educational Assistance Act aims to reduce the complexity of the tax code, decrease possible inequities among taxpayers and remove disincentives to upward mobility. “Unlike other code sections that govern educational assistance, Section 127 does not require either an employer or employee to make a distinction between job-related and non-job related educational assistance in order for the employee to receive the assistance,” the coalition pointed out. “Section 127 therefore ensures that administrative complexity is reduced and clarity is achieved for both the employer and employee.”
MUTUAL BENEFITS
This relationship is currently being played out with Wal-Mart, the nations’ largest retailer, and the American Public University, a for-profit school with about 70,000 online students. APU plans to offer eligible employees 15 percent tuition deductions, while Wal-Mart will invest $50 million over three years in other tuition assistance for the employees who participate.
“If 10 to 15 percent of employees take advantage of this, that’s like graduating three Ohio State Universities,” Sara Martinez Tucker, a former undersecretary of education, told The New York Times. “It’s a lot of Americans getting a college degree at a time when it’s becoming less affordable.”
Employees must have been on the job at least one year full time, or three years part time to be eligible to participate in the program. They must also score well on their most recent evaluation.
APU is currently reviewing jobs at Wal-Mart to determine which ones will qualify under the agreement. In about two years, Wal-Mart expects that 70 percent of U.S. employees will be in jobs that have been reviewed by the university.
“While there is broad agreement about the need for more Americans to attain college degrees, we recognize that there is a healthy discussion under way about the best way to get there,” said Leslie Dach, Wal-Mart’s executive vice president for corporate affairs and government relations. “One of our aims with this program is to try some innovative approaches that seem promising, grounded in what is already known in the field. We hope in this way to expand the education and employer communities’ knowledge of what works most effectively, so that policy makers, other companies and other stakeholders can continuously improve such offerings.” ♦