June 16, 2014

MinistryCPA Special Topic: Qualified Tuition Reduction Plan Guidelines

The IRS lays out very specific and stringent regulations for organizations that offer tuition reduction plans to their employees (e.g., Publications 15B525, and 970). Below is a brief overview of the major guidelines that non-profit organizations should keep in mind when implementing such plans for primary, secondary, and undergraduate higher education.

First, qualified tuition reduction plans are not taxable as compensation to the employee. If an organization meets all of the requirements for a qualified plan, this can be an extremely valuable benefit to employees.

Second, tuition reduction plans must be received from, and used at, an eligible educational institution. According to Publication 970, "An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities." Therefore, a homeschool is ineligible.

Third, qualified tuition reduction plans must not discriminate in favor of highly compensated employees. Publication 970 says, "The tuition reduction benefits must be available on substantially the same basis to each member of a group of employees." Since they are a fringe benefit, tuition reduction plans are not intended as a method of compensation for the services of "volunteers."

Finally, a tuition reduction program qualifies if it covers:
  • A dependent child of a current or retired employee, or one who left because of disability
  • The employee him/herself
  • A widow or widower of an employee meeting those conditions
While these guidelines should provide some direction for non-profit organizations, each organization's situation is unique and may require professional assistance.

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