Section 127 Educational Assistance Plan

The following questions and answers relate to the University’s Section 127 Educational Assistance Plan, which will become effective on July 1, 2002:

  1. What benefits are provided under the Section 127 Plan?
    The Section 127 Plan is intended to provide favorable tax benefits only.  The Plan will exclude from taxation graduate-level courses provided by the University to eligible employees, up to a maximum of $5,250 per calendar year.  Although most educational benefits currently available to employees are already exempt from taxation under other provisions of the Internal Revenue Code (IRC), the Section 127 Plan provides relief from taxation for those employees whose graduate-level educational benefits are not covered under other Code provisions.
  2. Who will benefit under the Plan?
    Employees enrolled in graduate-level courses under the Reduced Fee Enrollment Policy that are not job-related will benefit from the Plan.  The value of such courses will not be taxed, up to the $5,250 annual limit.  Employees enrolled in non-job-related graduate courses taken for professional development at another educational institution are also covered by the Plan and will not be taxed on the value of those courses, subject to the annual limit.
  3. What kinds of graduate courses are covered under the Plan?
    The Plan covers graduate-level courses of a kind normally taken by an individual leading to a law, business, medical, or other advanced academic or professional degree.  Covered courses do not include courses or other education involving sports, games, or hobbies. Courses covered by the Plan may be taken at the University of California or at another educational institution.
  4. Are any undergraduate courses covered under the Plan?
    No.  Undergraduate courses provided by the University to employees are excluded from taxation under IRC section 117.
  5. Why are job-related courses not covered under the Plan?
    Job-related courses are already exempt from taxation under IRC section 162.  Thus, only courses taken for professional development that are not directly related to an employee’s current position are covered by the Plan.
  6. What is the definition of a job-related course?
    A job-related course is a course taken by an employee either to maintain or improve skills required in the employee’s current job; or to meet the express requirements of the employer; or the requirements of law or regulations, imposed as a condition to retaining the employee’s salary, status, or employment.  See Accounting Manual Chapter T-182-77 for more information.
  7. Are Section 127 educational benefits reportable on the Form W-2?
    No.  The instructions for Form W-2 provide that payments qualifying under a Section 127 educational assistance program are not reportable in box 1 as wages. Only waivers or reimbursements (for non-job-related graduate courses) in excess of the $5,250 annual exclusion limit would be reported on the Form W-2 as taxable compensation, subject to withholding.  Accordingly, such excess amounts should be paid through the payroll system.
  8. What are the requirements for a Section 127 Plan?
    Section 127 requires that an employer prepare a separate written plan for the exclusive benefit of its employees to provide such employees with educational assistance. In addition, eligible employees must be provided reasonable notification of the availability and terms of the plan, and the plan must not discriminate in favor of highly compensated employees.  Section 127 does not require the educational assistance program to be funded.
  9. May benefits be provided on a retroactive basis?
    No. Section 127 requires that employees be provided with reasonable notice about the benefits available under the plan.  If benefits are provided before the plan is in effect, employees have not been provided with the requisite notice.
  10. Are there any IRS information reporting requirements related to 127 Plans?
    No. The IRS has indefinitely suspended the reporting of data related to the administration of a Section 127 Plan (IRS Notice 2002-24).

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