Tax Reform Would Scrap Tax-Free Tuition Reimbursements

Proposal to more than double tax-free reimbursements ignored

Allen Smith, J.D. By Allen Smith, J.D. November 3, 2017
Tax Reform Would Scrap Tax-Free Tuition Reimbursements

[Editor's note: Employer-provided tuition assistance will remain tax-free as conference members between the House and Senate scrapped a House plan to make that benefit count as taxable income for employees.]

Tax reform, in its current version unveiled by the House of Representatives Nov. 2, would repeal tax-free employer tuition reimbursements, even as employers are calling for these payments to be increased, according to Kathleen Coulombe, Society for Human Resource Management (SHRM) senior advisor, government relations.

Doing away with Section 127 of the Internal Revenue Code, which provides for the tuition reimbursements, is a "mind-boggling" proposal, said Pat Castelli, CFO of Niles Bolton Associates, an architectural firm in Alexandria, Va., and Atlanta. "How can you have a mortgage interest deduction and not allow this?"

Increase Needed

Section 127 currently allows an employee to exclude from taxable income up to $5,250 per year in employer-provided educational assistance for undergraduate or graduate studies or certificate work, as may be required in health care. The benefit covers tuition, fees, books, supplies and equipment. Employers are not required to provide assistance under Section 127.

Congress should expand the Section 127 reimbursements, recommended Sen. Jeff Flake, R-Ariz., and Rep. Jason Smith, R-Mo., in an Oct. 25 proposal that would raise the employer tuition reimbursement amount to $11,500 and index it to inflation. For nearly 40 years, even as the cost of tuition has skyrocketed, the amount employers can give to employees, without being taxed as income, has remained the same.

[SHRM members-only HR Q&A: Tax Treatment: How does The Economic Growth and Tax Relief Reconciliation Act affect educational assistance programs?]

SHRM strongly believes that providing tuition assistance is a key component to a comprehensive benefits package that helps HR recruit and retain top talent, Coulombe said.

But the current amount—$2,625 per semester—isn't enough, Castelli noted.  Tuition "can run much higher," which leaves employees with a lot of costs to bear.

Even for employers that already reimburse students above $5,250 per year, an increase in the tax-free amount "would have a positive impact on the administration of the program, avoiding the processing of taxable wages for the amounts over $5,250," noted Michelle Voisinet Caylor, director of human resources with Modern Technology Solutions Inc. (MTSI) in Alexandria, Va. MTSI reimburses up to a maximum of $10,000 per calendar year for continuing education. The courses must be job-related and through an accredited program for the tuition to be reimbursable.

Student Loan Reimbursement

In addition to wanting to be able to continue to reimburse students' tuition, employers would like tax-free student loan reimbursement, which was proposed earlier this year.

"We have started a student loan contribution program at our firm, and I have heard from many that they wish it was a tax-free program," Castelli said. "Student debt is a life-changing problem and one we all need to acknowledge. Our employees are affected by the financial strain of the debt they must pay off. They have difficulty renting apartments, buying cars and most certainly buying homes."

Tax reform has a long way to go before becoming law, with consideration by the Senate still on the horizon. It's possible that Section 127 will not be eliminated, and could possibly be expanded as legislation progresses, according to Coulombe, who is spearheading SHRM advocacy efforts to preserve the popular employer-provided benefit.


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