COMPTROLLER'S SEAL STATE OF CONNECTICUT

STATE OF CONNECTICUT

NANCY WYMAN
COMPTROLLER
OFFICE OF THE STATE COMPTROLLER
55 ELM STREET
HARTFORD, CONNECTICUT 06106-1775
MARK OJAKIAN
DEPUTY COMPTROLLER

MEMORANDUM NO. 2008-41

November 24, 2008

TO THE HEADS OF ALL STATE AGENCIES

ATTENTION:   Chief Administrative and Fiscal Officers, Business Managers, and Payroll and Human Resources Officers
SUBJECT:   Determining Tax Status of Employee Tuition Reimbursement Payments

I. PURPOSE

The purpose of this memorandum is to provide information on how to determine whether an employee’s tuition reimbursement payment is nontaxable or taxable.

II. AUTHORITY

Internal Revenue Code (IRC) Section 127, "Educational Assistance Programs," and Section 132(d), "Working Condition Fringe," permit tuition reimbursements to be excludable from wages (nontaxable) under certain circumstances.

III. EDUCATIONAL ASSISTANCE PROGRAMS - SECTION 127 IRC

Under IRC Section 127, tuition reimbursement payments made by an employer under an educational assistance program are excludable from the wages of an employee, if certain requirements are met. The reimbursements may be for either undergraduate or graduate level courses. The educational assistance is not required to be job-related. The exclusion from the employee’s wages is limited to the first $5,250 of educational reimbursement payments per calendar year. Educational reimbursement payments over $5,250 are generally not excludable from income unless the payments qualify as a working condition fringe benefit.

IV. WORKING CONDITION FRINGE BENEFIT - SECTION 132(d) IRC

Educational assistance exceeding the $5,250 calendar year limit may be excludable from income under IRC Section 132(d) as a working condition fringe benefit. Exclusion under IRC Section 132(d) applies only if IRC Section 127 does not apply. Please use the following guidelines when determining exclusion from income under IRC Section 132(d).
 
Reimbursements for education expenses qualify as a nontaxable working condition fringe benefit if the following requirements are met. Qualifying educational expenses are for undergraduate or graduate level courses. For reimbursement to be excluded from an employee’s income, the course must be job-related and either maintain or improve job skills or be required by the employer or by law. For courses required by employer or law, the requirement must be expressly stated by the employer or by state law or regulations. There is no dollar limitation.

A. Non-Taxable Tuition Reimbursements

If the reimbursement is for a course that is job-related and either maintains or improves job skills or is required by the employer or by law, it is not taxable.
 
This includes refresher courses, courses on current developments, and academic or vocational courses.

B. Taxable Tuition Reimbursements

Reimbursements for courses taken to meet the minimum educational requirements for an employee's current position are taxable.
 
Reimbursements for courses that are a part of a program of study that can qualify for a new trade or business are taxable, even if the individual is not seeking a new job.
 
Reimbursements for review courses to prepare for the bar examination or the certified public accountant (CPA) examination are taxable, because these courses may qualify an employee for a new profession.

V. REQUESTS FOR PAYMENT

The following procedures are to be used when processing employee tuition reimbursement payments:

A. Non-Taxable Tuition Reimbursements - Agency Funds

Payments that meet the criteria outlined in Section III or Section IV.A are non-taxable, and the processing of these tuition payments, using agency funds, is through the payroll system. Form CO-17XP-PR must be completed using Earnings Code TU1 - Tuition Reimbursement - No Tax.

B. Taxable Tuition Reimbursements - Agency Funds

Payments that meet the criteria outlined in Section IV.B are taxable, and the processing of these tuition payments, using agency funds, is through the payroll system. Form CO-17XP-PR must be completed using Earnings Code TU2 - Tuition Reimbursement - Taxed.

C. Non-Taxable Tuition Reimbursement - Union Funds

Payment requests for reimbursement of tuition and other professional development costs from union funds must be processed by submitting a form CO-101 to the Comptroller’s Fiscal Policy Division, Tuition Reimbursement Unit. For non-taxable tuition reimbursements meeting the criteria outlined in Section III or Section IV.A, check the box YES under "Job Related" on the CO-101.

D. Taxable Tuition Reimbursements - Union Funds

Payment requests for reimbursement of tuition and other professional development costs from union funds must be processed by submitting a form CO-101 to the Comptroller’s Fiscal Policy Division, Tuition Reimbursement Unit. For taxable tuition reimbursements meeting the criteria outlined in Section IV.B, check the box NO under "Job Related" on the CO-101.

VI. GENERAL

Please direct questions to the Office of the State Comptroller as follows:
 
Union Funded Tuition Payments: Fiscal Policy Division, (860) 702-3334;
 
Payroll Procedures: Payroll Services Division, (860) 702-3463;
 
Memorandum Interpretation: Fiscal Policy Division, (860) 702-3440.


NANCY WYMAN
STATE COMPTROLLER

NW:CH

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